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Perry Ellis International (NASDAQ:PERY)

Q2 2014 Earnings Call

August 22, 2013 9:00 am ET


George Feldenkreis - Founder, Chairman and Chief Executive Officer

Oscar Feldenkreis - Vice Chairman, President and Chief Operating Officer

Anita D. Britt - Chief Financial Officer and Principal Accounting Officer


Edward J. Yruma - KeyBanc Capital Markets Inc., Research Division

Eric M. Beder - Brean Capital LLC, Research Division

Ronald Bookbinder - The Benchmark Company, LLC, Research Division

Jared Schramm - Roth Capital Partners, LLC, Research Division

Robert F. Ohmes - BofA Merrill Lynch, Research Division

David Weiner - Deutsche Bank AG, Research Division


Good morning, ladies and gentlemen, and welcome to Perry Ellis' Second Quarter of Fiscal 2014 Conference Call.

Before we begin, I would like to remind you that some of the comments made on the call, either as part of the prepared remarks or in response to your questions, may contain forward-looking statements that are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Such information is subject to risks and uncertainties, as described in the press release and in documents that we have filed with the SEC.

Joining us today for the call from Perry Ellis are George Feldenkreis, Chairman and Chief Executive Officer; Oscar Feldenkreis, Vice Chairman, President and Chief Operating Officer; and Anita Britt, Chief Financial Officer. I would like now -- I would now like to turn the call over to George Feldenkreis.

George Feldenkreis

Thank you. Good morning, and thank you for joining our conference call. We concluded the second quarter with a 1.1% increase in revenue over last year and an adjusted EPS of $0.15 loss in line with average analyst expectation. Considering the current market condition, we feel that the company had a satisfactory performance for the quarter.

As you have heard from most retailers, second quarter weather hurt revenues from Northeast and Midwest stores substantially. Spring summer season product did not stop selling until a few weeks ago, impacting overall business and also negatively affecting all of our replenishment programs.

During the last quarter, we saw continued growth of our Nike swim business. We are also gratified that the Rafaella brand is now running ahead of last year in revenues and profit. Furthermore, our namesake Perry Ellis brand is performing ahead of the prior year. We expect Perry Ellis and Rafaella to continue this positive trend for the rest of the year. Strategically, we are exiting a number of private-label businesses and replacing those businesses with branded products with better long-term growth potential.

During this quarter, our direct to consumer business decreased by 9% over the previous year. Much of this related to plans in our Original Penguin distribution being too tight during the first half of the year. This was a key learning experience for us moving forward. We feel that we have overcome those issues, and month-to-date, we are showing a 10% increase on direct Internet sales and a minus 7% comp plus 2% [ph] in total Penguin sales.

For Perry Ellis' outlet, we are showing flat comps versus last year, which is currently an improvement, and we feel that we will be able to recover the lost ground during the second half. We have had new Penguin retail and also e-commerce management as a result of this, and this leadership shift is starting to show improved results. Adding to the positive momentum, our stores in the United Kingdom are starting to show increases over last year numbers as well.

We are committed to our direct to consumer strategy in a measured way. We plan to have 5 to 6 new stores in the second half of the year. We should finish the year with 71 domestic stores and 6 stores in the U.K. Our U.K. operation has had a good quarter, and we look forward to even more impressive performance for the second half of this year.

We're in the process of introducing our golf brand to the United Kingdom and in Europe starting early next year. It's a promising new market expansion for our stronger business categories. We are beginning to add to our organization in London, building our golf sales overseas and we will provide more information about this in the third quarter call.

Year-to-date, our income business through brick-and-mortar retailers grew by 12%, while our business with pure e-tailers, like Amazon and Zappos, has grown by 30% compared to last year. Our growth in e-commerce validate the strength of our brand and the connection with the consumer.

Brands are more important than ever in this highly evolving Internet age. You need brands to be found on search engines. And that is precisely what we will continue to build: solid, recognizable, searchable brands.

On the sourcing side, we continue to work with our worldwide vendors to increase their efficiency so that they can withstand the impact of higher global labor costs. While labor costs continue to increase in China and other countries, the pressure of staying in business versus losing customer to other companies have made many manufacturers much more efficient in managing their labor costs, perfecting their structure. We expect our costs to stay stable for the immediate future.

During the quarter, our International wholesale business revenue increased by 6.4% and now represents 9% of our total revenues. Our business in Canada and Mexico managed to expand by 12%, and the U.K. by 4%.

Royalty income also increased by 13.6% for the quarter, which is a consequence of the strength of our brand sales overseas. We believe our brands are significantly underpenetrated throughout Europe, and as their economies recover, we are building upon a strong opportunity. We continue to work on strategies to expand and capitalize on our diverse portfolio of golf apparel and swim business throughout Europe and Latin America.

Financially, we're stronger than ever, as you will hear from Anita Britt. I would like to mention that our liabilities at the end of this quarter decreased by $39 million or 10% compared to year end.

For us, this is a year of rebuilding. We must make sure that our core businesses perform well and with a sense of urgency. It is all about implementation and proceeding with discipline and good operating plans. Strategically, we are focused on the core businesses of our leading brands and continue investing our associates the sense that it's about growing our business and becoming more profitable so we can continue to expand and build a better company for everybody.

In essence, it's about inspiration, ownership and idea, and our associates are answering that call. After all, our associates are our most valuable assets and they know it's about how we're going to implement that plan for growth and success in our domestic and international market.

I want to thank all of you for listening, for your support and your patience. You have our commitment that regardless of economic condition, we will continue to work very hard to make Perry Ellis a better company.

I'll now turn the call to Oscar.

Oscar Feldenkreis

Thanks, George. Good morning all. As you have heard from numerous retailers, there was a bit of headwind in Q2 created by unpredictable weather patterns across the country, which kept shoppers from purchasing apparel and related items. Our lines were not immune to this behavior. What we did see was when the weather was cooperative and product was fresh and inviting, consumers bought. Our continued mission is to make sure we drive innovative quality assortments that meet their demands when they are out in the market.

As we have moved into the second, third quarter, we have seen that customers becoming more confident in their spending with discretionary income and moving those purchases to soft goods. Our women's and men's collections business sharpened their merchandise assortments from last years. Retailers have responded positively to the fall presentation as well as spring offerings for next year. We believe that retailers will remain cautious with their fall buying plans. Our goal is to improve selling and drive margins, both for us and for our retail partners. Spring provides a lot of opportunities that we increase the distributions in doors and golf, expanded our reach within international as well as expanded our women's assortments across all customer base.

Let me address our business areas. As to the Perry Ellis brand, during the second quarter, our Perry Ellis business was driven principally by dressy component, which is the DNA of the brand. We are pleased with this performance at retail and the dressy business will continue to be the main focus for the Perry Ellis brand going forward. Perry Ellis portfolio, our classification product, remained strong across the board, driven by strong dress pants, belts, wallets, gifts and tailored clothing. Our slim initiative is performing to expectation as we continue to increase our penetration. We have just wrapped up Spring 2014 market and retailers were pleased with the direction of the line, which again is focused on the success from spring 2013. While retailers remain cautious for fall '13 into spring 2014, we remain optimistic that our assortments will continue to drive consumer purchases.

Golf. Turning to Golf Lifestyle apparel, one of the most profitable categories for our business. Our momentum continues as the brand overall performed strongly at retail with solid margin improvement. Today, we service 19,000 retail doors, which spans from all channels of distribution, as well as we are servicing both the male and female gender consumer. We are also will be launching golf accessories this holiday season. We feel that this enhances our current brand portfolio. The golf accessory initiatives will be launched under the Ben Hogan brand.

The response from our retail partners has been favorable and they feel this is a good way for us to increase our presence and dominance in the golf market, as we plan to add more accessories to some of our other brands going forward. The key to our success is the institution of a good, better, best pricing strategy for our Lifestyle Golf branded apparel, enabling us to reach customers with varying income levels and across multiple distribution channels.

For Callaway, total business is up over 50% for both the second quarter and first half of the year, driven by the launch of our green grass program as well as a healthy corporate business. We're also adding department store doors and we are slated to launch direct to consumer site this fall. Callaway men's continues to gain market share by balancing the market needs of a promotional core and fashion product categories. We have seen solid growth in product category extensions, such as Big and Tall growing sales by over 50% compared to last year.

With respect to PGA TOUR, we are launching the brand in 460 Macy's doors set to take place this fall, strengthening the PGA TOUR brand nationally in more distribution points and aligns more closely with the Macy's golf strategy. We're also very excited with the recent victory of our endorsed player PGA TOUR professional, Jason Dufner, at the most recent PGA championship victory 2 weeks ago.

Onto the women's golf, another successful initiative, we are now in over 750 doors for the Callaway, and our shipments for the first half of this year exceeded plan by increased amount demand. For PGA TOUR women's, we increased our door count 20%, reaching close to 600 doors. It is the strongest performing brand within the moderate price pointed brand competition in ladies.

Internationally, Callaway and PGA TOUR continue with solid growth momentum, and we will ship to Deportes Marti, essentially the Dick's Sporting Goods of Mexico, with PGA TOUR in 21 doors and Callaway in 12. Starting this October, our Latin American green grass distributors are also reporting that the lines are being well received. PGA TOUR in Canada, which is in its first year, is off to a very strong start as we're in all 118 Sears Canada doors and exceeding plan.

Father's Day proved to be very strong for the Ben Hogan collection at Walmart, with sales over 30% to plan with a continued success of the brand carrying the legendary golfer's name. Walmart will expand the line to over 3,000 stores for 2014 from approximately 2,000 doors currently. The Ben Hogan collection will further increase its presence as we add new licenses, which will enhance the lifestyle. The online availability of Ben Hogan at has increased the brand's exposure and created a buzz nationwide. In fact, Walmart Canada will introduce Ben Hogan starting spring 2014 in over 380 doors. We are thrilled about the future of Ben Hogan as we plan to reach new markets over the next couple of years.

Turning to our women's division, sales at retail for Rafaella continued to strengthen and the brand saw a very solid second quarter. We have expanded our high volume core performance item and strengthened the brand's competitive presence in pants, jackets and tops, with a much improved lifestyle offering. Our strong executive design and sales teams, combined with an attention-getting to new marketing campaign, have brought additional relevance and momentum to the Rafaella brand in the marketplace.

Laundry by Shelli Segal experienced solid retail performance in spite of a more difficult contemporary dress environment. Speaking to the strength of the brand, we continue to see growth within our licensing partners. The Laundry lifestyle is truly expanding into every corner of the ladies lifestyle, with multiple touch points and emotional collections.

With respect to Original Penguin, this quarter marked a new beginning for the brand under a new management team. We look forward to realizing the benefits from our strength and leadership team. The team will continue to penetrate the passion of the Penguin patron with local brand partnership, social media marketing initiatives and more. Penguin's following is increasing exponentially, leading to increased brand loyalty. And most of all, sales in the domestic wholesale side, Original Penguin is exceeding plan at retail with margin improvement due to better product assortment and our focus on selling the brand as a lifestyle to the retailers and specialty store partners. On the domestic retail side, selling on the initial fall collection has showed significant improvement and we have focused on getting more units of inventory into every door to meet demand after planning to leaning [ph] for the first half.

Nike swim. For the second quarter, we experienced an outstanding quarter, with sales up over 40% as all channels and categories saw positive comps. Our department and mid-tier retail partners are putting a renewed emphasis on mega brands, such as Nike, and our Nike swim line is benefiting greatly from it. The sporting goods channel grew over 60%, and this channel represents almost 30% of Nike sales mix. This quarter, our Nike swim's Internet sales grew over 100%. While currently a small portion of the brand's overall business, it represents a significant growth catalyst, which we are actively investing in.

We just concluded the menswear show in Las Vegas, and we are happy to report that the show was well attended. We were able to see most of our core retail partners. The optimism going into the second half of the year and forward forecast for spring is positive. We feel very optimistic on our core future as well as our product offering across all of our brands. Some of the early reads of our fall product assortment has been very strong.

In summary, we continue to be focused on our lifestyle brands, keeping our fingers on the pulse of the consumer and building the emotional connection and quality merchandise of our brands. I am extremely excited about our core business, the prospects that I see in each business for the future.

Thank you again for joining us on this call. And now I will pass the conversation over to our CFO, Anita Britt, who will summarize our financial results for the quarter. Thank you.

Anita D. Britt

Thank you, Oscar, and good morning, everyone. For the second quarter, we realized $212 million in net revenues, essentially even with prior year results.

Turning to performance by segment, our men's sportswear and swim segment recorded revenues of $153 million, slightly up from $151 million in the prior year. Within the segment, we realized a 1% increase in golf apparel revenues, which benefited from spring shipments of Ben Hogan, as well as expansion of our PGA TOUR and Callaway brands into Mexico and Canada. These increases were offset by a reduction in shipments for our Grand Slam brand in the mid-tier distribution channel, as overall sales in that channel have slowed and retailers are taking a more cautious position. Nike swim experienced solid increases, driven by the strength of the brand across all distribution channels. Our Perry Ellis collection sportswear performed well, with revenues up mid-single digits for the quarter, reflecting the addition of new accounts and doors.

In Europe, our U.K. business performed fairly well, posting a 4% increase, driven by the Original Penguin brand. We are especially pleased with this increase, given the unfavorable weather and macroeconomic issues the continent faces and faced in the quarter. These segment increases were offset by the remaining planned exit of private label programs within various retailers.

Turning to our women's sportswear segment, it recorded revenues of $32.3 million, as compared to $30.5 million in the prior year. Our Rafaella brand increased in the mid-teens, benefiting from some early shipments of fall goods. This increase was partially offset by reductions in Laundry shipments as we saw tighter plans with many of the contemporary departments. The brand remains extremely strong with consumers, as evidenced by the growth in Laundry's licensed revenues in the quarter. In fact, Laundry grew to represent our third largest licensed brand after Perry Ellis and Original Penguin.

Moving on to direct to consumer. Revenue in the segment totaled $19.6 million for the quarter as compared to $21.5 million for the prior year. This reflected a comp store decline of 5.9%, which followed our toughest comparison from last year when we recorded a comp increase of 12.4%.

In addition to the difficult comparison, we attribute the negative comp to having lighter-than-optimal inventories in the Original Penguin stores, which was driven by tighter plans. We have increased the units per door moving into August, and we believe that we are in a solid position to drive sales in the third quarter. We also felt the general malaise toward apparel purchasing in Q2, as consumers have shifted purchases to higher ticket durables.

Our direct e-commerce sales were down 18% for the quarter, as we continued to roll out a less promotional strategy across our sites. As planned, we will anniversary this activity by the third quarter.

In terms of our overall store count, we ended the quarter with 69 domestic locations and 5 European locations. By channel, 22 of these locations were full price and 49 were outlets. Across concept, 43 were Perry Ellis, 24 Original Penguin, and 4 were other concepts. The overall impact in direct to consumer to our plan reduced net sales by approximately $2 million in the quarter or $0.05 in earnings per share for the quarter.

Finally, licensing income registered a 14% increase to $7.2 million for the quarter, driven by the strength of our businesses in Perry Ellis, Original Penguin and Laundry, all adding categories and increasing within existing licenses over the last year.

Moving on to gross margins for the quarter. We saw margins pull back approximately 70 basis points as compared to our guidance that expected a small lift. The lower margins were driven principally by the lower contribution from direct to consumer than our plan, as well as a mix of lower margin sales to the special market channel, which offsets higher markets -- higher margins in the mid-tier distribution channel. On the positive side, we saw margins improve in both our men's and women's collections sportswear businesses, as performance improvement helped to reduce overall deductions.

SG&A totaled $66.5 million for the quarter and included $836,000 for costs associated with the consolidation of our New York offices. Net of these costs, SG&A totaled $65.7 million as compared to adjusted expense of $62.6 million in prior year. The increase for the quarter reflected additional investment in brand marketing, e-commerce, photography and other infrastructure spend, which we've talked to.

Turning to the balance sheet. Our net debt position totaled $116 million, reflecting a net debt to total capitalization of approximately 23%, a very comfortable level that provides us with a lot of flexibility to operate and grow our business. Receivables at the end of the quarter totaled $140 million, a 10% increase over prior year, and our aging continues to be very strong and the overall health of our retailers is solid.

Inventories totaled $179 million at quarter end as compared to $183 million at year end and $165 million in prior year. Our inventory turnover did improve to 3.8x as compared to 3.5x in prior year. Our management continues to be a key focus for us by business as we look to drive greater efficiencies. And we really see a very solid current aging when we look at the overall inventory. It's in very good shape.

For the second half -- for the first half, excuse me, we generated $14 million in operating cash flow, and capital expenditures approximated $50 million for the half, principally driven by the investment in our New York office consolidation.

Turning to our outlook. In terms of the fiscal '14, we currently expect revenues to increase by 2% to 3%, which reflects the softness in our retail stores during the first half of the year, coupled with more cautious plans that we've experienced across our retail partners, most dramatically with the mid-tier channel.

Now by business for the year. We see men's sportswear and swim revenues are now expected in the range of $715 million to $725 million. This reflects men's wholesale in a range of $555 million to $563 million. Within there, we expect Perry Ellis to be relatively even, and we expect mid-single to high-single-digit growth in all other businesses, driven principally by golf, where we expect increases in the mid-teens. Swim revenues are expected to increase in the mid-single-digit range to $83 million to $87 million, driven by the strength of the Nike brand. International revenues are expected in the range of $72 million to $76 million, reflecting growth in the U.K., Mexico and Canada. And as a reminder, within men's, we have exited approximately $20 million in private label programs, which in -- primarily impacted the first half of our year. Women's revenues are expected in the range of $145 million to $153 million. We have reduced the expectation for dresses for the year, given the more challenging first half environment.

Direct to Consumer domestic is expected to be even with last year in a range of $83 million to $88 million. We expect mid-single-digit comps for Q3 and high-single-digit comps for Q4 as we face easier comparisons versus last year, coupled with increased revenue from new stores opened over the past 12 months. Finally, we expect Licensing to be up now in the mid-single digits given the strength that we have seen in our key brands year-to-date.

We continue to expect adjusted gross margin to expand by approximately 100 basis points for the year, driven by higher full price selling and lower promotional support in collections sportswear businesses, higher margins in golf sportswear, as well as the higher margins in direct to consumer for the second half of the year.

We now expect SG&A to increase by 5% to 6% versus the prior guidance of 6% to 7%. We are still investing in advertising as well as the new rent consolidation for our New York offices, so none of that has changed. But we are realizing tighter expense controls within our base, which is driving the offset. Overall, we continue to still expect earnings per share on an adjusted basis in a range of $1.50 to $1.60.

Now looking at the second half in terms of breakdown. We expect a 3% to 5% increase in revenues in the second half. From a flow by quarter, we expect Q3 to be even to down 2%, driven by more conservative retail comps and the outlook from our partners for fall. We want to take a more conservative stance.

For the fourth quarter, which includes spring plans, we now have new additions for further door rollout and expansion of Ben Hogan, PGA TOUR and Callaway. We will also be introducing additional golf brands with some of our strong retail partners, which will reflect initial spring sets. The addition of Rafaella sport with casual components will also drive further growth for the spring season, and we also see our direct to consumer comps, including e-commerce, having a higher lift versus last year's fourth quarter.

We expect gross margins in both quarters to expand. Q3 should be up approximately 100 basis points, while we see Q4 expanding over 200 basis points. And again, that's off of the lower margins that we're comping prior year. We would expect expenses for each quarter to range in -- to be in the range of approximately $68 million to $68.5 million. We expect full year D&A in the range of $12.5 million to $13 million, interest in the range of $14.5 million to $15 million and a tax rate of $34 million to $34.5 million. In addition, shares outstanding are expected to be in the range of $15.3 million to $15.5 million, and that is prior to any share repurchase.

We expect our cash flow from operations to generate $50 million for the year and we continue to forecast capital utilization of approximately $20 million, principally for our New York office build-out, new and remodeled stores and normal maintenance capital. We expect inventories to remain relatively even at year end, and we do think that there's an opportunity that they will be below prior year inventories, and we are focused on accelerating our turnover throughout the year.

And with that overview, I'm going to turn the call over to the operator to open it up for questions from the audience.

Question-and-Answer Session


[Operator Instructions] And we'll take our first question from Edward Yruma from KeyBanc Capital.

Edward J. Yruma - KeyBanc Capital Markets Inc., Research Division

I want to drill a little bit down into DTC. Obviously, you've changed some of the management there. But I guess, just trying to really understand, it's a difficult environment, so I guess why expect -- why should we expect that DTC business to improve so materially in the back half? And then two, as we think about the mid-tier channel, you guys highlighted some of the weakness you're seeing there. How do you feel about the inventory levels at the mid-tier? And is there a chance that higher markdown activity could result in markdown that you might have to pay in future quarters?

Oscar Feldenkreis

Ed, it's Oscar. As to the mid-tier and in general, we have a very, very sophisticated planning organization and system, so we track sales on a continuous basis and we develop our plans based on sell-throughs on the product. Our golf business in the mid-tier channel is doing extremely, extremely well and performed -- and exceeding plan as well. So we have not seen the -- a slow down in golf in general within the mid-tier channel that -- maybe they have experienced in other product categories currently today. We're still seeing a strong momentum in performance polos and performance product actually exceeding sales of cotton-based product going forward. In terms of direct to consumer retail stores, it was really more of an inventory situation. We tightened up the inventory too tight in the stores. And based upon what we are seeing with early fall deliveries that have been shipped into the stores, which is really our 7/25 deliveries, which have hit the stores in August, we're seeing strong momentum on that product, and as well as it's less colorful from the first half going into the second half. So it's really more of an inventory equation that we experienced in the first half.

Anita D. Britt

Yes, just to add to the direct to consumer comment, we have started to see the traffic patterns pick up as well. Our conversion has remained strong. And another thing to remember, Ed, is just in terms of comparison, our second half comps last year were roughly about 5.5%. So our outlook, in terms of improvement off of that versus first half where you had 10% and 12% comps, give us an opportunity for a larger lift in the second half.


And we'll take our next question from Eric Beder from Brean Capital.

Eric M. Beder - Brean Capital LLC, Research Division

Could you talk a little bit about the Perry Ellis America launch, how that is going? And how longer term should we think about the growth rates of Perry Ellis and other brands outside 2013, now that you've kind of pulled away from the private label products?

Oscar Feldenkreis

I don't hear the question.

Anita D. Britt

The question was our outlook on Perry Ellis America as that launches in the second half of the year. And I believe the other part of the question, which I had trouble hearing, was about just Perry Ellis' growth rate on a longer-term basis. Is that right, Eric?

Eric M. Beder - Brean Capital LLC, Research Division


Anita D. Britt

Okay. Go ahead, Oscar.

Oscar Feldenkreis

The Perry Ellis America, we are just shipping the product as we speak, so we have no feedback. But for spring, we will be adding retailers currently that we're in the process of developing those plans, and we should have more information and updates on that by first week of September as we go into the spring 2014 season. We're very optimistic. We feel that there is an opportunity within retail for Perry Ellis America as we look forward -- going forward. As to the Perry Ellis brand in general, we still see lots of potential growth. We have started to do business with Bon-Ton. We're excited about that. And as well as some of our licensees are doing business with them, so we feel that there's an opportunity to continue to grow the brand, and as well as we expand -- our licensees are doing extremely well. And there's direct to consumer opportunities. We just had a great meeting with Amazon, where they have a big plan to grow the Perry Ellis brand within their dot-com business. So we feel very optimistic about the future of Perry Ellis, as we continue to focus more on our DNA versus focusing on the casual side of the collection, which did not perform for us this spring season.

Eric M. Beder - Brean Capital LLC, Research Division

On golf, do you have the potential to add more brands into your mix? And are you looking at any potential acquisitions given how strong your balance sheet is going forward?

Oscar Feldenkreis

We are looking for additional brands. What's also important to note is that today, like in Macy's, with the launch now of PGA TOUR, we also -- in many cases, we also do businesses with some of these retailers with actually 2 golf brands, not only 1 golf brand. So our market share of penetration in golf specifically within retail is very, very strong because we have a good to better, best strategy, which allows us to basically almost control 75%, if not 80%, of the golf market in the United States at retail. As to the future, we are looking at additional brand and potential acquisitions within this channel, not only in golf apparel, but also in other product categories that might become an opportunity to enhance our current lifestyle brand as we feel that this is a niche that we have continued to perform. And we feel that, not only domestically, but internationally, it creates lots of opportunities.


And we'll take our next question from Ron Bookbinder from The Benchmark Company.

Ronald Bookbinder - The Benchmark Company, LLC, Research Division

On the inventory, inventory looked to be up over 8% year-over-year, while you mentioned that the aging is very fresh. Was this just a timing issue as to the difference of the quarter ended a week later than last year?

Anita D. Britt

Yes, Ron, I'll take that question. Yes, we did -- we definitely had a shift in the retail calendar, which gave us an incremental 6 days. So timing could certainly play a piece of it. As we look at the inventory levels, we did want to ramp them up a bit to be ready to outfit the retail stores with a little -- with some more units per store. So that was a piece of it. We also as -- when we're analyzing the inventory, we're looking to make sure that we have sufficient weeks of supply for our go-forward businesses. So as we looked at our needs for Q3 and Q4, they may have looked -- the inventory overall may look a little bit higher than it was last year. But you have to remember last year as well, we were comping off of an inventory decrease from over $200 million. So it's an inventory level we're very comfortable with. We are increasing our turnover. It's very current. And our expectation, as we shift through Q3 and Q4, is that our inventory levels should come down. And by year end, we should be lower than prior year.

Ronald Bookbinder - The Benchmark Company, LLC, Research Division

Okay, great. And on the Ben Hogan line, we heard out at the men's apparel show, possibly a premium line of that. Could you talk more about that?

Oscar Feldenkreis

We will be launching a Ben Hogan premium line with several retailers and -- which hopefully we will be launching for the fourth quarter. And that line will be a totally different product category, as well as totally different design. We feel that the Ben Hogan brand has so much equity behind it. And as well as you hear a lot of golfers and even in most of -- whenever they talk about most golfers in tournaments, they always talk about the Ben Hogan legend. So the reception has been very strong for the Ben Hogan brand. The PGA superstores will be launching the Ben Hogan premium brand, as well as other retailers that we're in the process now of confirming those plans for the fourth quarter. So that will be in addition. And hopefully, by Q3, we will have more updates on that, but that looks very promising as well. As I mentioned, we will be launching accessories with the Ben Hogan brand as well.

Ronald Bookbinder - The Benchmark Company, LLC, Research Division

And lastly, golf going to the sporting goods channel, when should we expect that? And what brands could you take to that channel?

Oscar Feldenkreis

What we're currently doing with Dick's, the Callaway brand, and we see that business continuing going forward, we'll start shipping them now in the Q4. And in terms of other retailers within the sporting goods channel, we also do business with Academy with PGA TOUR, as well as Dunham, they carry both PGA TOUR men's and ladies and that performance continues to be strong. And we've been doing business within the sporting goods channel with PGA TOUR for a while, and that business just continues to accelerate and grow, adding now the women's component to the assortment.


And we'll take our next question from Jared Schramm from Roth Capital Partners.

Jared Schramm - Roth Capital Partners, LLC, Research Division

Looking at women's golf, as a percentage of total golf, where do you see that this business to grow to at the end of 2015?

Oscar Feldenkreis

I think golf -- women's golf should be about 25% of our business. There is a big component -- there's a big opportunity in that. There's really no market leader in that space. We have a very, very strong design talent team. And we're just really starting in that market, and the reception has been very, very, very, positive. That's from a -- from all channels of distribution straight across the board. And that's really our focus that we're servicing 19,000 retailers, why not service them on the women's side also. And remember, active wear today is probably the strongest performance category out there, so it's really more at leisure, what we're seeing. It's not only golf apparel specifically, but we can also do capris and we could do a lot of different product categories, as that's really becoming the new lifestyle of how a woman is dressing. So we're attacking her from both fronts, not only for the true golfer, but also with at-leisure product.

Jared Schramm - Roth Capital Partners, LLC, Research Division

Okay. And looking to Walmart Canada, I think you said you'll launch in about 380 doors. Any outlook for that line there? And could you provide a little more color on what you're seeing, as far as Walmart online is concerned, with the Ben Hogan line?

Oscar Feldenkreis

Well, we haven't -- we have not started shipping Walmart Canada, but they're very excited, and that will be going into all 380 doors of Canada, and as well as hopefully, rolling out Ben Hogan on the Canadian e-com site as well. E-com at Walmart has been -- they're making a very big push going forward on e-com. So being that we are a primary vendor on the branded side and we have a lot of content to provide them with Ben Hogan, there's a big opportunity and they're very excited. And as I mentioned, we will be announcing 2 licensees to the Ben Hogan brand domestically, which will only enhance the offering of Ben Hogan, because at the end of the day, it's really how much additional offerings can we bring to the dot-com side that primarily might not be available only on the brick-and-mortar side. But if we can expand that probably into accessories and other product categories, it will even enhance the business. So we're very excited with the partnership that we have with Walmart. They're very excited as well. And upper management at Walmart is very excited about the Ben Hogan brand.

Jared Schramm - Roth Capital Partners, LLC, Research Division

And lastly, looking at what you expect will still be a 100 basis point year-over-year improvement and gross margin would really imply a pretty really healthy DTC and e-commerce business in the back half of the year. You mentioned you saw traffic pickup, the Walmart -- or sorry, the Amazon opportunity, what else gives you confidence in the DTC and e-commerce business in the back half of the year to help that gross margin meet the target?

Anita D. Britt

Well, it's -- Jared, it's not just the DTC that will drive that. I mean, DTC is definitely a larger percentage of our business. In Q3, it represents about 9%. In Q4, it represents about 11%. So it is a bigger piece of the overall mix. We do expect it to improve, but the other components that are driving the improvement in margin as well is the improvement in the Perry Ellis and Rafaella collections. That's also driving improvement on a year-over-year basis, as well as the overall mix within the golf component of our business as a percentage of our business is driving that gross margin expansion as well.


[Operator Instructions] We'll take our next question from Robert Ohmes from Bank of America Merrill Lynch.

Robert F. Ohmes - BofA Merrill Lynch, Research Division

Just 2 follow-up questions, one was on golf. Can you update us on the JCPenney shop-in-shop rollout and talks on how big that business could be? And then the second question, more of a broader question, looking at Perry Ellis and Rafaella, I think in particular, how did the -- how are you expecting the average selling price trends to play out this fall season within the department stores for those brands?

Oscar Feldenkreis

The -- Robbie, the AURs on both Rafaella and Perry has been increasing because we have bettered the product assortment and delivered more regular-priced selling. So as a matter of fact, like in Perry Ellis -- in Perry Ellis classification on the portfolio bottom side, our AURs are actually up, and we will be even adding a new assortment even at a higher price point in the premium wool-blended product assortment in Perry. So, both on the Rafaella and Perry side, our AURs are actually up. We have also managed our inventories much better this year versus last year, so we've seen much better regular price selling by flowing the inventories into the stores, much better than what we had done last year, as we -- last year, really, we were liquidating a lot of our inventory, and that's when really we started the transition into this year. In terms of your other question on JCPenney, JCPenney is very committed to the golf business. We are in the process now of discussions of a potential secondary golf brand with them, which hopefully we should have finalized within the next 30 days. They will be -- we're in the process now of actually developing the whole entire golf shop concept with them, which that has not been finalized. But hopefully by fourth quarter, we will be rolling out golf shops in a very good format where it will house 3 brands within this golf environment, which will also be enhanced with signage, strong visuals on golf, which we're very excited going forward with them. So that is all in the works. And hopefully, by Q3, we'll have more updates on that as we go forward. But that is something that they plan to roll out, not only on brick-and-mortar, but also on e-comm side as well.


And we'll take our next session from Dave Weiner from Deutsche Bank.

David Weiner - Deutsche Bank AG, Research Division

So just a quick question, a lot of my questions have already been answered or asked. But I guess I would ask on Europe, you like, I think, several other retailers are starting to call out maybe a bottoming in trends or improving trends. Can you just give a little bit more detail there in terms of what you've seen? And is that kind of a very recent phenomenon versus the entire quarter? Or just kind of any color on the trends you're seeing in Europe would be helpful.

George Feldenkreis

I think that -- this is George, I think that we have reached -- from our perspective and all we hear there -- I was in Europe last month -- the situation is improving, especially in the United Kingdom and also in France and other countries. So we feel that this is the time now to invest in building a bigger organization than we have today and continue our efforts. Our retail stores are already showing much better performance versus last year.

David Weiner - Deutsche Bank AG, Research Division

Okay. And then actually, George, maybe another question for you. You talked a little bit about labor costs in China continuing and other countries continue to go up. Any view on -- any early read on source or kind of all-in sourcing costs into early next year?

George Feldenkreis

I think from the labor standpoint, they will continue to increase, and the strategy for all importers is really to move product always from the higher-priced factories and countries to lower price, and that's why you'll find -- although we have very little in Bangladesh, you'll see that more and more of the business going to Bangladesh regardless of what you hear on the other side. Indonesia is now becoming also a big focal point for everybody as well as Vietnam have been for a number of years, but Vietnam already have a situation where it's hard to find workers in the big cities in Hanoi, Da Nang, Hanoi. So it's an evolving matter. And we have switched more business into Jordan and areas where duty free for the United States. That is also the conversation about an agreement with all the Asian countries what's called the Trans-Pacific duty-free area. So there is a lot of movement on that side. And there is one reality. Even though Chinese labor has gone up, many factories have managed to actually lower cost because they don't want to lose the business and close the factory. So some of the smaller manufacturers had to close, but a lot of -- especially, a lot of business is moving to areas outside of the very big cities like to Hunan and Henan and to Shandong area that were not preferred by importers before, and now they have to go there.

Anita D. Britt

Operator, we'll take one more question.


And it appears that we have no further questions at this time.

George Feldenkreis

Thank you very much, and we'll continue to work very hard to make this a better company. Bye.


And this concludes your -- today's program. Thanks -- thank you for your participation. You may now disconnect.

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