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A. T. Cross Company (NASDAQ:ATX)

Q2 2013 Earnings Conference Call

July 24, 2013 4:30 pm ET

Executives

David Whalen - President & CEO

Kevin Mahoney - CFO

Analysts

Dave King - ROTH Capital

Andrew Burns - DA Davidson

Joe Munda - Sidoti

Ronald Bookbinder - Benchmark Company

Bob Meeder - UBS Financial

Operator

Good day, ladies and gentlemen.

Before we begin, I'd like to take a moment to read the Safe Harbor statement. Statements contained on this call that are not historical facts, are forward-looking statements made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995, including, but not limited to our ability to successfully close the sales of COG in the third quarter of this year. And to smoothly transition the business to wire. Our ability to sustain the relatively low capital cost at COG. The continued geographic and demographic expansion of the Costa and Native brands continue penetration in the prescription market. At Costa the anticipated growth of Costa's apparel and accessory business and the growth due to our investment in and attention to online sales and social media initiatives at COG.

In addition, words such as "believes," "anticipates," "expects," and similar expressions are intended to identify forward-looking statements. These forward-looking statements are subject to risks and uncertainties, including, but not limited to consumers' willingness to purchase discretionary items, particularly, in accordance with our historical, seasonal expectations, overall changes in consumer confidence and/or preferences, the inability of COG to expand geographically and demographically, the ability to effectuate the sale of the CAD business in the third quarter of this year.

Additional discussion of factors that could cause actual results to differ materially from management's expectations are contained in the Company's filings under the Securities Exchange Act of 1934. Including, but not limited, to the annual report on Form 10-K for the year ended December 31, 2012, and other filings made periodically by the Company. The Company undertakes no obligation to update this forward-looking information.

I'd now like to turn the call over to Dave Whalen, President and Chief Executive Officer. Please go ahead, Dave.

David Whalen

Thank you. Good afternoon and thank you for joining us. With me on the call today is Kevin Mahoney, our Chief Financial Officer.

In the second quarter of the Cross Optical Group or COG continue to drive our business. COG revenue increased 18% to over $32 million a record quarterly performance. On a brand basis, Costa grew more than 20%, while Native revenue impacted by poor May/June weather and its key markets decline.

The revenue performance resulted in 14% growth in COG operating income. Our optical business is firing on all cylinders as we saw growth in all segments including non-prescription sunglasses, performance apparel and prescription eyewear. Given that first half performance from COG was better than we had expected, we are raising our 2013 revenue guidance for COG from $95 million to $97 million.

As we enter the second half of the year, our confidence in the optical group’s business model and growth potential is extremely high as our authentic brands and products attracted new consumers’ everyday.

On July 15, we announced that we have signed an agreement to sell the Cross accessory division which includes the Cross brand to an affiliate of Clarion Capital Partners for $60 million cash. The deal is expected to close in the third quarter. A number of you have asked questions about the deal and our future plans through Dave Mossberg at our Investor Relations firm through private advisors.

I will answer the most common of those questions now. The first question is, what are the plans we are building in the Costa and Native brands going forward? We are extremely excited about our optical group’s business model and prospects. We have competed in the premium sunglass business for just over 10-years and have grown our revenue at a rate of 23% per year. We will continue to invest in driving this growth.

Our sunglass business requires very little capital approximately $2 million per year and that range should not change dramatically. The free cash flow from our COG group is more than sufficient to support our optimistic plans for COG. Our sunglass business as you can see from our first half results has great momentum and our focus for 2014 will be to develop program and infrastructure that accelerates that momentum.

Another question that we have received is, will you make acquisitions by using the capital from the Cross accessory division sale? Yes. And we will focus on two areas. First, we think that the performance sports eyewear category has great growth potential globally. We have witnessed since we purchased Costa the growth in consumer participation in outdoor activities. This trend combined with the increased emphasis being placed by doctors and opticians on optical health and the importance of wearing high-quality sunglasses is fueling premium sunglass growth and makes the category very attractive. As a result, we will continue to pursue acquisitions in the performance sport eyewear category.

The second area, that we will consider is brands and categories that are popular with consumers who love the water. From our Costa success we know these consumers and how to reach them. In addition, nearly one half our revenue is generated in the sporting goods channel of trade and we know that we can leverage that distribution. These factors provide the belief that we can succeed with other brands that help consumers perform around and enjoy the water. We are deliberate when it comes to acquisitions but we expect to become more active in this area as we reshape the company.

The third question is, what level of public company and corporate cost will the company retain going forward? The best way to look at this is to understand that until the end of the year we will be helping to transition the Cross accessory division business to Clarion with a larger corporate staff and its necessary to move forward. For the best analysis is to look at projections for 2014.

For 2014, approximately $3 million in public company and corporate cost will no longer be absorbed by the contribution from the Cross accessory division. To break this down and our guidance for 2014, we are expecting our Cross Optical Group to contribute between $110 million and $114 million in revenue and approximately $19 million to $20 million in operating margins.

Assuming the completed sale of the CAD division and $3 million in public company and corporate overhead cost, solo operating profit for the entire company would be approximately $16 million to $17 million. This performance would generate roughly $0.80 per share. Earnings, between now and the end of the year, we will look for ways to reduce the overhead costs but $3 million is a good figure with which to build your model.

Finally, we have been asked why did we retain the U.S. designed benefit pension plan? That plan was frozen in 2006 and at the end of last year, the liability associated with it was $19 million. As the plan is frozen and the assets have earned on average 10.3% per year over the last four years, the biggest variable driving the liability is interest rate assumption.

In fact, you could say that most of that liability was created by the following interest rate. We expect that this interest rates rise from the historic lows, our pension liability will be substantially reduced at which point we will develop a strategy to annuitize it.

Those seem to be the most pressing questions on people’s mind since we announced the deal. As I said in the press release, we still have several weeks of work to get to a closing. When we announced the closing, we will be that much further down the road and will provide further guidance on our transition to a fast growing pure opticals/outdoor company.

Our entire focus now is grow the Cross optical group. Our 2013, growth plan now calls for $97 million in revenue from our sunglass business which implies 18% growth. With 18% first half growth in the books and continued momentum in July, we are now inside of achieving the $100 million annual revenue milestone for our sunglass business. It maybe a stretch to get there this year but we will certainly surpass a $100 million next year.

We often get that how we will keep this growth going? The answer is, that we have a disciplined approach that not only includes door growth but also innovative programs that support organic growth with our existing retail partner. For our Costa brand we will first expand geographically. We are currently in about 6400 of the 10,000 retail doors in which we will ultimately gain United States distribution.

Year-to-date, Costa has added approximately 500 new doors, the southeast, Texas in the Northeast where the areas were the most progress was made. We will continue to drive into these areas as the year progresses. Ultimately, of course, we are striving to make Costa a national brand.

Second, we will continue to add demographically to our (inaudible) consistency of 25 to 35-year old male fishermen by offering new products and programs targeted at college students and costal lifestyle consumers. In this regard for the eighth year running our (Euro Blue) College store made its way across the south this spring stopping at various universities as we introduced our brand and products to our new group of potential consumers each weekend. Some of the events are small but others attract thousands of people. It is a terrific grassroots effort that has helped to bring new uses for the Costa franchise, an another way that we will continue to build awareness through Costa sponsorship of Osearch. Osearch is a project that involves the tagging and releasing of Great White Sharks. It continues to generate great buzz and Costa is a part of it. To-date, the project has generated over $40 million impressions for Costa.

Euro Blue, Osearch and Kenny Chesney, which you will hear about in a minute are all about building awareness of the Costa brand. Costa frame and lens technology is terrific and the more people that to get know about our brand, the greater the trial and the growth. We are having an excellent season in this regard and we will continue to press our performance throughout the summer.

Third, we will drive full-priced, full margin business on our website costadelmar.com. Revenue from the site is up over 60% this year. As the Costa brand gets larger, the number of consumers that we can have dialogue with growth. This communication is being handled in a discipline way, the goal of bringing consumers for the Costa website and franchise. This strategy is working and we will continue to aggressively invest in the site as the year moves forward.

Fourth, we will support our growing apparel and accessory business. Consumers have been vocal about wanting to probably display the Costa brand on their hats and shirts and with the growing support of our retailers we are accommodating them. 2012 sales of apparel and accessories were up over 50% and year-to-date sales of these lines have nearly doubled as our key accounts build on the success with the experience last year.

Fifth, we are back with Kenny. Costa and Kenny Chesney teams up in 2011 and 2012. We are doing again this year as this spring and summer Kenny plays at 48 stadium venues throughout the country. Once again, Kenny as designed limited edition of Costa’s that have nearly sold out. Costa videos are played at its concerts, Costa’s has the presence on Kenny’s website. Year-to-date Costa gained nearly 15 million consumer impressions from this year’s association with Kenny. And our research tells us that there is a great link between water sports and country music and Costa is now part of that link.

Finally, and very importantly for the Costa brand, we will continue to penetrate the prescription sunglass market. We launched the Costa prescription program in March 2011. In 2011 and 2012, we built distribution, drove awareness of the program and learned the best practices at the optical channel of trade.

We are so encouraged by our progress that in August 2012, the Costa Rx lab opened. It is the state-of-the-art 10,000 square foot facility located in Mexico, its main facility in Daytona Beach. Bringing lab, work in-house, increased margins, nearly 15 points this year.

Improved service level and allow the Costa Rx team to better control product quality. Year-to-date our prescription business has grown over 20% and we expect that rates to continue through the year. We are very enthusiastic about the prospects for the Costa Rx business, in the coming years, the Costa Rx business will become a significant part of the Costa brand experience. Costa is a phenomenon and we intend to take advantage of its growing popularity to continue to expand our sunglass business.

Now, the goal for our native brand is to help grow sunglass sales in the mountain sports communities like climbing, biking, running and skiing. While the Costa brand revolves around the water. Native has been built on the mountains.

In the first quarter, Native showed solid 8% growth as we continue to focus on door growth and on expanding the branded and national account. Native increased its overall door count in 2012 by approximately 10% and its done the same this year adding 127 new doors of distribution. In Q2, however, the business slowed as poor weather in the Northeast and Midwest reduced consumer takeaway in the important May-June period.

In July, the brand has shown solid growth and year-to-date of brand revenue is flat with 2012. On the product side, Native’s new lens technology called the N3 lens and its new line of technical frame called the Odyssey series continue to do well. The Odyssey series with the N3 lens was well accepted by the trade and consumers in 2012 and the styles though we added in 2013 such as (Pig Fork, East Trim and Sycara) had been strong addition at retail.

Native is a an excellent brand for the mountain sports community, we’ll continue to invest in it and expected to grow as 2013 moves forward. Our Sunglass business is an exceptional business and it is growing fast in a disciplined way at a sustainable pace. It is gaining share, it utilizes capital efficiently. It has many evidence for growth. 2013 will be another excellent year where we will see powerful growth from the business. We’re excited about the potential of our Costa, Native brands and think investor should be as well.

Now, I’ll turn the call over to Kevin.

Kevin Mahoney

Thanks Dave.

The details of our second quarter’s financial results accompany the press release, released this evening on those certain of the activity in those results and my comments and also provide details have not presented in the release this evening.

In the second quarter, our revenue grew 9.6%, the Optical Group as Dave noted grew 18% and our Cross Division was down about 1% for both the current quarter and year-to-date. The Cross Division’s revenue declines can be substantially attributed to both the weaker Yen versus 2012 and lower levels of discontinued product sales this year than we had in 2012.

Our second quarter gross margin was 58.4%, up from 57% in 2012 and that expansion was driven by improved gross margins in both operating segments. Our second quarter operating profit included non-recurring costs associated with our Cross Division. First was $1.4 million non-cash charge associated with the termination of a legacy pension plan for former Cross employees in Ireland. And the second were approximately $500,000 of costs associated with the Cross Division divestiture process.

Adjusting for those two items and these adjustments by the way are presented in the details of the financials which accompany our press release. Our second quarter operating margin was 12.4%, up from 11.4% in 2012 and our Cross Optical Group’s year-to-date operating margin was 19.3%, up from 19.2% in 2012.

As further 2013 earnings information, we are currently planning for an 2013 effective tax rate of approximately 33%. Our second quarter and first half EPS information, both before and after adjusting for the non-recurring Cross Division charges that I previously described are also presented in the details accompanying our press release. But after adjusting for these non-recurring items, our EPS grew 32% in the second quarter from $0.28 to $0.37. And our year-to-date earnings per share grew 27.5% from $0.40 to $0.51.

There is nothing in particular I have to comment on regarding our balance sheet and so, therefore, I’ll turn the call back over to David.

David Whalen

Thanks Kevin.

So, we’re looking forward to the balance of 2013. In the third quarter, we expect to close the deal to sell the Cross Accessory Division at which time that business will be reported in discontinued ops.

As for the Sunglass business, we expect this year to achieve $97 million in revenue in between $16 million and $17 million of operating income. Assuming the sale of the Cross Accessory Division, we will finish this year with roughly $5 per share in net cash on our balance sheet and enter 2014 as a company growing our top-line, greater than 15% with approximately $0.80 per share in 2014 earnings power.

Thank you for listening and now we’ll take questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Dave King from ROTH Capital. Your line is open and you may proceed.

Dave King - ROTH Capital

Thanks, good afternoon, guys.

David Whalen

Hi, Dave.

Dave King - ROTH Capital

I guess, I guess first of congrats on the (inaudible) Costa this quarter. I guess the main question, I was curious about in terms of the $5 in net cash they are going to have on the balance sheet, Dave you laid out some of the different things, just thinking about in terms of what to do with the cash between acquisitions, it sounds like you don’t really trying to reinvest all that much in the business from (such come out) of free cash flow going forward. I guess when we think about buybacks and can you just kind of allow how you prioritize those different things especially with the stocks trading where it is at and just help us think about that a little bit better?

David Whalen

Well, I think as I said the business certainly generates enough cash to – we can reinvest to generate the growth that we think is very strong, it will be very strong for the business and keep it going at the rate certainly that it has been going at.

In terms of – so I think that is always going to be the first priority to grow the top-line of the Cross Optical Group through organic growth of Costa and Native. Now we have the - and then that’s I think it be funded pretty well from the cash flow from that business. If we need to put more in from another source we will but I think that business can certainly fund itself and keep the growth going.

Then I think we will look certainly at acquisitions to those the portfolio around those two very strong brands and build the business that way as I said the performance of sunglass business is a – we think a terrific category to stay involved with and we’ll certainly seek ideas to get more deeply penetrated in that area. And I would put that along with the view that we have opportunity and knowledge in the sporting good channel of trade particularly with brands that appeal to consumers who play, could play or enjoy the water.

And so I think those areas, so one is organic growth, two is acquisition. And then I think if you ask we’re going to continue our buyback program. We still have roughly 700,000 shares available with -- in terms of the buyback we haven’t been able to do any this year because of the announcements for the CAD business but we look to continue that as we get beyond the announcement of the closing of that deal. But I think it would be in that order Dave.

Dave King - ROTH Capital

Okay, that’s helpful. And then as we think about the apparel business in particular right now and reinvesting in that business, have you thought about accelerating the reinvestment in that at all given the success you had there?

David Whalen

Well, I think yes, we’d have I think we’re reviewing it, we invested -- we’re investing this year in more people frankly who know the business. Our sunglass team has done a terrific job of growing that business but now we’re trying to get a little more expertise in-house who actually have apparel industry experience.

And then certainly we can look at those people will look beyond what the lineup we – the product lineup we have and how we can develop a lineup that it’s a little bit broader not too broad but a little bit broader than they had some T-shirts and visors that we have today and we think we’ll have given the performance we’ll have good reception and better retail. So the investment really is in people who know the area and can help us think about and develop a continued growth strategy for that business.

Dave King - ROTH Capital

All right. Thanks so much. Very helpful.

David Whalen

Right. Thanks.

Operator

Thank you. And our next question comes from the line of Andrew Burns from DA Davidson. Your line is open. And you may proceed.

Andrew Burns - DA Davidson

Thanks. Good afternoon and congratulations on a great quarter and the recent CAD announcement.

I was hoping to pick your reign a little bit more on your acquisition strategy from the framework of your existing organic growth rate is so strong in the eyewear business. I'm wondering how important of a criteria organic growth is relative to just earnings accretion considering assets in the marketplace probably you’re going to have a pretty (wealthy) evaluation from a takeout standpoint in the space and perhaps just wondering if there is appetite to buy companies that are accretive would have a lower growth profile.

Kevin Mahoney

Dave, I’ll take that one. Andrew it’s Kevin Mahoney. I think of course before we just said, it’s a well understood and I think as Dave said in his remarks, the number one priority to drive value going forward for our shareholder is to continue the top-line organic growth most importantly the pace that Costa has been on and for Native as well. So, that’s in terms of ways to drive positive value creation for our shareholders that is numero uno.

And then look we understand, we need to articulate what we intend to do with the amount of cash that would be in our balance sheet and kind of the substantial cash that Optical Group -- free cash flow if you will that it droves up perspectively as well. And so, I think we believe is an opportunity to lever the retailers that our Optical Group is involved with if not for Sunglasses then for other premium brands for people who play in the water but we don't think its mission critical for developing worthwhile shareholder value going forward.

But we do need -- we are responsible for deploying that capital in a way that’s best for shareholders and so as we go forward until the end of the year, I think it would be better able to articulate if that deployment means solely acquisitions or could include something else.

Andrew Burns - DA Davidson

Thanks. And then, we’re looking at the Native performance year-to-date, first in terms of the weather impact, is the difference between Native and Costa in terms of Native being much more impacted entirely, geographic related or are there any other issues for Native that that you can potentially call out that were sources of opportunity going forward?

Kevin Mahoney

No. We are happy with the Native product line up. We believe will put in a good effort into the marketplace. If you think about other brands breakdown geographically Costa’s core remains the Southeast, Native’s core is the Northeast and the Midwest, Rocky Mountain. And that was just not a great weather spring for those areas -- the Native areas. And I think that that impacted the brand. And as I implied in my calls, weather is gotten better here at end of June, first three weeks of July and Native has bounced back.

So, they had a good first quarter up 8%, down second quarter because two biggest months, weather was not great, weather turned and July looks very strong.

Andrew Burns - DA Davidson

Thanks. And then the last question, just a point of clarification, I may have missed it but I didn’t hear a gross margin by division particularly for COG, if that’s access available, that would be great.

David Whalen

Yes, sure. Yes, it is not in our press release, so, let me give it to you for the accessory division, it was 56.8% versus 54.2% last year and for the Optical Group, it was 59.5%, its gross margins in the second quarter versus 59.2% last year. Year-to-date, the Optical Group’s gross margins are 59.1% and we guided to 59% for the full year, but 59.1% in the first half for Optical versus 58.9% last year.

Andrew Burns - DA Davidson

Great, thanks. And good luck in the back half.

David Whalen

Thanks.

Kevin Mahoney

Thanks.

Operator

Thank you. Our next question comes from the line of Joe Munda from Sidoti. Your line is open and you may proceed.

Joe Munda - Sidoti

Good afternoon guys. Thanks for taking the question.

David Whalen

Hi, Joe.

Joe Munda - Sidoti

Dave, real quick, I know a lot of people were asking about acquisitions but in terms of selection, would you look an acquisition has a similar model to what you have a little apparel sunglasses where would you know you think performance play in the water but I’m just trying to get a sense, would it be a similar model or easily -- easier to integrate and will you be willing to take on debt of a potential acquisition?

David Whalen

Well, again, I don’t want to get this call too focused on acquisition because as Kevin and I had both said the primary goal of our business is to drive organic growth with the two brands that we have, but we will certainly look at acquisitions that are consistent with the brand in the business that we have. So to answer your question the easier the integration the more likely or the more attractive that would be to us. Would we take on debt given the level of cash that we would have I don’t believe we would go that far - we would - anything we would do we would certainly I believe fund within the cash that we have.

Joe Munda - Sidoti

Okay. And then as far as the up guidance on the COG side, I’m just looking back at the press kit here. You had gross margin guidance of 59% for this year. Is that subject to change with the up guidance that you guys provided or do you think that will be still right around 59%?

Kevin Mahoney

Yes, I plan on 59%.

Joe Munda - Sidoti

Okay. And then as far as prescription goes, any idea -- percentage of Optical Group revenue that was for the quarter?

David Whalen

It’s still below 10%.

Joe Munda - Sidoti

Okay. And then Dave also on the up guidance itself I’m just curious that the assumptions that are being made, is it Costa continuing to power through or are you guys expecting a rebound from Native in the second half of the year, how should we look at that?

David Whalen

No, I think -- I think any -- Costa drive that business, so I mean Native will improve but the real driver is Costa.

Joe Munda - Sidoti

Okay. And then my last question I will make it quick. With the number of -- are you seeing increased competition from like lower price point brands competing against Native in those categories, there is a number of lower price point polarized sunglasses out there, are you seeing some pressure there?

David Whalen

Well it’s always going to be Joe the lower price options out there but what we win with and what we won was with Costa and we intend to win with -- Native is lens and frame technology. So we think our products are built so they can carry and do deserve a premium and that’s where we are at, but there will always be a wide range of price points below our brands all the time.

Joe Munda - Sidoti

Okay. Thank you guys.

David Whalen

Welcome.

Operator

Thank you. And our next question comes from the line of Ronald Bookbinder from the Benchmark Company. Your line is open and you may proceed.

Ronald Bookbinder - Benchmark Company

Good afternoon and congratulations on a great quarter.

David Whalen

Thanks.

Ronald Bookbinder - Benchmark Company

Just to make it clear on the possibility of an acquisition, you are not looking to do anything really anytime soon you are focused on building Costa out nationally and getting Native ramped up better before you would consider an acquisition. Is that what you are saying?

David Whalen

I think that’s a good way to look at, I don’t know if I had said before we consider one, but that’s certainly the top priority. And as we get through the Cross Accessory Division closing as we build our plan, as we complete our plans for the Costa, Native and the Cross Optical Group for 2014, which sort of all happens in this late third early fourth quarter period, then we will be able to begin to look at what different ways we might deploy that capital, but certainly in terms of funding and approaching how we are thinking about 2014 there is so much opportunity in terms of expanding the Costa brand and expanding the Native brand that those will get the vast majority of our attention.

Ronald Bookbinder - Benchmark Company

And could you give us an example of a category or category --

David Whalen

No, I’m not going to do that right now. I think I would - if we go down that route I’d prefer to have to do it in a way where we can present it to you in a full thoughtful way rather than just picking up categories one at a time.

Ronald Bookbinder - Benchmark Company

Okay. And is there much call from consumers for Native apparel?

David Whalen

No, no, I wouldn’t say that, I’d say it’s -- Costa has reached the size and scale where it is, building awareness at a fairly rapid rates. And as I said over time, the Costa consumer is very, very loyal and very passionate and they want to probably display the brand. I think Native consumers are passionate and loyal there is just aren’t as many of them. So, they don't have the step their brand doesn’t have the scale yet, I think to carry an apparel program.

Ronald Bookbinder - Benchmark Company

And do you see that coming in the future, that it would go to that level or is it a different type of consumer that just doesn’t wear the brand?

David Whalen

I wouldn’t say I wouldn’t say it will reach that scale in the near term, remember I don't – we did not begin a Costa apparel program until it’s -- I believe it crossed the $50 million revenue range and Costa, Native is not near that yet.

Ronald Bookbinder - Benchmark Company

Okay, great. Thanks very much and good luck going forward.

David Whalen

Yes. Thank you.

Operator

Thank you. Our next question comes from the line of Bob Meeder from UBS Financial. Your line is open and you may proceed.

Bob Meeder - UBS Financial

Thanks. Hi, guys. Congratulations on the Costa phenomenon and the agreement with your accessory business. I wanted to kind of zero in on Native, Native had some headwinds last year with the stocking the lifestyles and so forth and now there is whether headwinds this year, I kind of like to get and I believe your sales and service organizations are separate for both brands, is that correct?

David Whalen

Yes. There are parts of it is integrated but there are some parts of it is separate as well.

Bob Meeder - UBS Financial

I’m wondering if this has created some churn on your doors and what more you had some specific ideas last year on getting Native on track and you had a good fourth quarter which included goggles, I like to know how the goggle sort of went and are you experiencing churn in your doors and kind of more specifically what your plans are to get Native in a growth mode?

David Whalen

Well, I think we continue to build, we think the terrific product lineup for Native and as I said in my call the Odyssey Series with the N3 lens has been successful. I think what the challenges with Native is to make more people aware of that brand and that product line up similar to where Costa was in its early days.

And so we will -- and we’re using a similar strategy of grassroots effort sponsorship in programs on the mountains, advertising in vertical magazines to gain that awareness in the mountain community among spot leaders and to drive the Native brand that way. It has not worked to the level we want yet but we will we believe it’s the right strategy and we will continue to invest in it.

In terms of account churning, I don't – there hasn’t been a lot of accounts churning, I think where Native suffers is, it is a small brand and it battles for open to buy dollars among the key accounts that have been among a wide group of alternatives. Whereas Costa has built its position to a must have for the retailer, Native is not there yet and it’s our job to try to continue to get it there. So it does get its fair share of open to buy.

Bob Meeder - UBS Financial

Okay. That’s kind of basic question, as these brands expand and especially Costa having a broader appeals and say a more narrow appeal that Native might address. It seems like that the success just feeds on itself. And the imprints and the words gets around that much quicker, so why not take this money and head to California to more aggressively roll up something that’s working extremely well rather than go to an acquisition to an unproven brand on the same scale.

David Whalen

I think our performance with Costa and the strategy we have used to roll out Costa that’s I think if that’s what you think we should do in terms of going to California. I think the strategy and the result would show the strategy we have employed on Costa has worked very well and that is pretty much a strategy to move contiguously from state to state across the southeast into Texas up to Colorado or going the other way up to northeast. So we will get to California but we believe that the performance of Costa over the last 10 years have -- basically 20% per year compounded process. The strategy we have is right and to loop over states is not a place we are willing to go.

Bob Meeder - UBS Financial

Okay. Thank you very much.

David Whalen

You are welcome.

Operator

Thank you. (Operator Instructions) Our next question comes from the line of Chris Owen from (Appliance Fund). Your line is open and you may proceed.

Unidentified Analyst

Good afternoon and congratulations.

David Whalen

Hey, Chris.

Unidentified Analyst

Was just wondering if you could elaborate aside from your acquisition plans. Now that you will soon be focused on the optical group entirely, are there what things can you do now that you couldn’t do before, are there particular segments of the Costa business is international distribution more of a focus?

David Whalen

You know, Chris, it’s a good question. I think as we become a pure optical company, if you are a sunglass company. We are looking at a number of different ways to accelerate the growth of that business. And that will all become part of the kind of the back half of the year planned development for 2014.

We think the programs that we have identified in putting all of our materials still have a long way to run that’s the geographic growth in the U.S. demographic and brand awareness growth, the Rx program, the apparel program, all of those can be more fully funded to accelerate growth and we will just look at the right balance between growing those businesses and delivering a bottom-line.

International expansion have certainly – an opportunity for us, there is no reason why Costa can’t be very successful internationally but we are really the way we will – we have had a lot going on here in the first half of the year, Costa will and Native will continue to drive through the third quarter and we will sit and kind of reflect on how the business had performed in the peak season and develop plans for 2014 to – with the objective as I said in my remarks to accelerate the very strong growth that we have seen.

Unidentified Analyst

And you have mentioned full funding of your existing initiatives? Would accessory and prescription indeed sort of the one that you would – about incremental time to or?

David Whalen

I think that’s a good way to look at it. I think that these are businesses that have really developed over the past two to three years and we are much more familiar with them and have seen that on a – I wouldn’t call it a test basis, but certainly on a small scale than the non-prescription sunglasses since we had but which we delivered success so I think the key is to figure out how to – how can we take all of the things we have learned and then successful where the most business is in-depth in those areas and accelerate the performance in those areas, while we continue to drive north of 15% growth on our non-prescription sunglass business.

Unidentified Analyst

Great. And then on the Native side in the past you talked about trials with chains that are big fans of Costa’s, can you update us on where those fans and is there a particular point in time at which you would expect to get decisions so to speak?

David Whalen

Well, we are filling those accounts. The performance is good. But we have not seen a huge expansion in or a meaningful expansion indoors from those accounts. So we will stay with it. And I’m sure they will review it at the end of the peak season. And we will go for more doors for 2014.

Unidentified Analyst

Great. Thank you, very much.

David Whalen

Thanks Chris.

Operator

Our next question comes from the line of Ronald Bookbinder from The Benchmark Company. Your line is open. And you may proceed.

Ronald Bookbinder - The Benchmark Company

Hi, I just have a follow-up question on prescription, while prescription is growing very well is the acceptance by ESPs holding back even greater growth?

David Whalen

No, I don’t think so. I think we are working hard for us to gain acceptance in our core markets. And I think that’s then – I think the acceptance in the distribution gain has been good. I think the next step is to get the ESPs to prescribe the product more or basically to tend us more job. And I think that is something that we certainly have improved upon from last year to this year. But it is a scenario that I think can be approved on as we go into 2014.

I say its good because this is up because I said over 20%, I certainly think we can do better at it and we are learning more about that area all of that.

Ronald Bookbinder - The Benchmark Company

Okay, great. Thank you very much.

Operator

Thank you. (Operator Instructions) We will give it a minute to see if we have any more questions.

David Whalen

Okay. Well, I appreciate all of you coming on the call and following the company and asking good questions and clarifying questions. And we will look forward to speaking to you again in October with our third quarter results. Thank you.

Operator

Thank you. Ladies and gentlemen, thank you for participating in today’s conference. This does concludes the program. And you may all disconnect. Everyone have a great day.

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