R.G. Barry Management Discusses Q4 2013 Results - Earnings Call Transcript

Sep. 5.13 | About: R.G. Barry (DFZ)

R.G. Barry (NASDAQ:DFZ)

Q4 2013 Operating Results Call

September 05, 2013 9:00 am ET

Executives

Roy Youst - Director of Investor and Corporate Communications

Jose G. Ibarra - Chief Financial Officer, Principal Accounting Officer and Senior Vice President of Finance

Greg A. Tunney - Chief Executive Officer, President and Director

Analysts

James Fuld

John H. Curti - Singular Research

Operator

Good morning, and welcome to the R.G. Barry Brands Fourth Quarter Full Fiscal Year 2013 Operating Results Conference Call. [Operator Instructions] Please note that this event is being recorded. Now I'd like to turn the conference over to Roy Youst. Please go ahead, sir.

Roy Youst

Thank you, and good morning. We hope you've received and reviewed a copy of this morning's earnings release. Our releases are available from the Investor Room section of our corporate website, rgbarry.com. You also can contact us at (614) 729-7200 to receive a release or to be added to one of our distribution lists. An audio replay of this call will be available shortly after its completion, and a written transcript will be posted on our website later this week.

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

Please note that statements contained in this call which are not historical facts should be considered forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by forward-looking words such as may, expect, could, should, anticipate, believe, estimate or words with similar meanings. Any statements that refer to projections of our future performance, anticipated trends in our business and other characterizations of future events are subject to all Safe Harbor qualifications set forth in our news releases, investor communications and SEC filings. Actual events affecting the company and the impact of those events upon our operations may differ materially from what is currently anticipated. For a list of some potential risk factors, please refer to our news release or to our most recent Form 10-K.

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

Jose G. Ibarra

Thank you, Roy, and good morning, everyone. We've ended fiscal '13 with a solid performance that generated an operating profit of nearly $21 million or in excess of 14% as a percentage of net sales. This performance, once again, placed us among the best-of-class in our sector. This is the second consecutive year and only the fourth time since 1980 we have reported a profit in each quarter of our fiscal year. This is, in great part, a reflection of our continuing efforts to transform R.G. Barry from a single-seasoned footwear company into a multidimensional, branded accessory business. The impact of this transformation is reflected in the composition of our revenue mix and additional operating profit.

Just a few years ago, all of our revenue and operating profit came from footwear. In fiscal '12, approximately 21% of our revenue and 13% of our operating profit came from the Accessories division. Last year, Accessories revenue increased to slightly more than 26%, and the Accessories operating profit contribution climbed to approximately 26%. Our quarterly consolidated net sales rose 2% year-over-year to $25.5 million. Consolidated net earnings were $280,000 or $0.02 per diluted share, down about 40% versus 1 year ago. Consolidated gross profit as a percentage of net sales was up versus the fourth quarter last year by 140 basis points, at just below 42%.

The quarterly gross profit decline reflected a shift in channel mix in both of our operating segments. Consolidated net sales for the year declined 5.7% to $147 million from last year's record of $156 million. This decline primarily reflects the elimination of some lower-margin Footwear business exited at the end of fiscal '12, the loss of our JCPenney men's program and reduction in size of 2 seasonal footwear programs in the clubs, all of which was partially offset by a $6 million, or nearly 19% increase in year-over-year net sales in our Accessories segment.

Consolidated net earnings for the year were slightly more than $13 million or $1.15 per diluted share, down about 9% from the record $14.5 million or $1.27 per diluted share reported 1 year ago. Our annual consolidated gross profit as a percentage of net sales was 43.5%, up 40 basis points from the equivalent period of fiscal '12. The slight increase in gross profit percentage primarily reflected the net of a richer product mix and the elimination of the lower-margin footwear programs we spoke about earlier.

Our annual consolidated SG&A expenses were at $43 million, down approximately 2% on a dollar basis from fiscal '12. This reflected the net of increased selling and logistics expenses, our continuing investment in the brands and lower expenses in other elements of the business.

Looking to the segments, annual net sales of Accessories increased by approximately 19% versus last year to nearly $39 million, producing a divisional operating profit of more than $7.5 million or nearly 20% as a percentage of net sales. For the fourth quarter, the Accessories segment reported just over $11 million in net sales and a divisional operating profit of about $2 million. Due to the previously mentioned reset of our Footwear business, annual net sales in this segment declined by 12% to $108 million, producing a divisional operating profit of about $24 million. Order in net sales in Footwear were $14.2 million, resulted in a quarterly divisional operating profit of about $600,000.

Some additional consolidated highlights from the financials include: EBITDA was $25 million; cash, cash equivalents and short-term investments of nearly $39.5 million, down slightly from 1 year ago; gross accounts receivable increased by approximately $4 million during the year, as a result of timing of shipments to customers and cash collections; net inventories were up slightly and properly positioned to meet the needs of our business at just over $24 million at year-end. This principally reflects the accelerated purchase of goods for full delivery in our Footwear segment. Net shareholders' equity was up 17% at $87 million at year-end. Depreciation and amortization for the full year was relatively flat at about $2.8 million. And finally, our effective tax rate for fiscal '13 was 38.4%.

And now Greg has some additional comments.

Greg A. Tunney

Thank you, Jose, and good morning, everyone. Before we get into what lies ahead for R.G. Barry Brands, I want to take just a moment and talk about some of our successes during the past year. The strong execution that made us a best-of-class performer for the past 8 years continued in 2013 and positioned the business to continue moving forward toward our next milestone on our journey, that is, becoming a $200 to $250 million business in the next 3 to 5 years. We ended the year with very healthy relationships with our key customers in footwear. We took market share from our competitors during a very difficult retail and holiday period, and positioned the segment to resume healthy and profitable top line growth in the future.

In accessories, we continued strengthening the foundations upon which we will grow the bag and comfort insert businesses. We completed 2 small strategic bag-related acquisitions for cash. We integrated a new customer-driven brand management ERP system that replaced the 20-year-old manufacturing-based dinosaur. The new system will grow with us as we add new businesses. And we also made significant bets on the future with expansions in e-commerce and international markets.

While immediate payback from these achievements may appear to be limited, long term, they align our existing enterprises with our future vision and enhance the flexibility of our variable operating model.

Dearfoams recently introduced its new multi-tier branding strategy to the trade, and will be testing several new exciting program this fall. At the recent New York accessories market, we experienced a strong positive reaction to our fresh new products and to the first results of our customer programs developed using innovative planning tools such as consumer analytics.

In the Accessories segment, investments in Baggallini and their development and sourcing platform will have a major impact going forward for us. Baggallini has recently wrapped up its seasonal trade shows, and the reception to some of their new travel-related bags was outstanding. This year, we will be spending on some long-term positioning of our bag-related acquisitions, Mosey and Kiva.

Foot Petals has an exciting new technological innovation called Technogel coming out of its development pipeline this year. We will continue expanding into new and underserved comfort insert markets. Our initial expansion in the international and e-commerce markets have produced small successes, and we believe that these growth initiatives will hold great promise for us for the long term.

As an organization, we are committed to making the investments necessary to build and maintain the high-performing winning R.G. Barry Brands team. We were honored this year to be named as The Best Place to Work in Central Ohio, a recognition we view as a direct reflection of our ongoing investment in building a high-performing team and a winning culture. Our high employee engagement scores ensures a strong team culture for the future for our organization.

The kinds of investments we've been talking about can carry significant costs and returns that may be far in the future. Our model generates operating margins that exceed many of our peers, giving us the financial capacity to regularly invest in ourselves. Going forward, we intend to increase the portion of our annual profits that we earmark for these kinds of investments. These investments will also position us to deal with evolving global trends that we believe will impact our business well into this century. Continued brand and retail consolidations, vertical integration among suppliers and retailers, rising labor and raw material costs, continuing supply chain migrations and faster technology-driven evolution of consumer behaviors are just a few of these trends. There is nothing that will help us reach the $200-million-plus level more quickly than completing a truly meaningful acquisition, and we continue to be active players in the market. The M&A market is currently very dynamic. We are seeing high multiples and lots of private equity money entering the marketplace.

We continue fine-tuning our M&A process, our filter and our resources we bring to bear in searching for the right acquisitions.

If you missed it in the introductions of our call today, we are very pleased announce that Gary Sandefur has been promoted to the new position of Vice President of Mergers and Acquisitions and Integration. And also, we'd like to welcome Gary's replacement Corporate Controller, Summer Cogar, to her first conference call with our company. Gary is now devoting all of his formidable energies and talent to our M&A work. He is building a robust pipeline of current and future acquisition prospects, developing relationships throughout the M&A world, providing analysis on potential market trends and new integration approaches and ways to accelerate the entire acquisition process while monitoring risk. We've also broadened the scope of our search a bit. We will be looking at additional business categories that align with our accessory universe such as e-commerce, Accessories businesses, and we'll also be looking at companies in select international markets.

While there certainly is no higher priority to us than identifying and acquiring great businesses, our M&A work will continue to be primarily driven by the quality of the deal and by our multi-point filter.

Looking forward, we expect to resume our pattern of increasing year-over-year revenue this year. Our non-promotional full-price Accessory businesses will continue to target a growth rate in the mid-teens. This past year, that category for us grew at 18%. The objective for our Accessory Footwear business will be a growth rate in the flat to low-single digit number, although at a higher profitability level than it was in 2013.

Now operator, we'll open it up for questions. I know that we have lots of participants on our call today, so we'll take a few minutes and take those calls.

Question-and-Answer Session

Operator

[Operator Instructions] And the first question comes from Ethan Star, a private investor.

Ethan Star

I'm wondering what progresses are made on, thus far, your international initiatives?

Greg A. Tunney

As many of you know, this last year, we hired Eric that runs our International division. He was placed in that position in November, and he's really spent the last 6 months really building the format, the structure, the foundation, if you will, going forward. We -- Eric had just gotten back from a lot of the different trips that were being doing. But I would tell you, Ethan, that we're actually pretty excited about some of the things that he's working on. We think, long term, that those are going to be building our businesses internationally. I think our approach right now is really selective international markets that we can really focus on and leverage our brands. We're doing about a little over $6 million a year in international markets as a total company. And our goal, Nathan (sic) [Ethan], is how fast can we ramp that up to $20 million to $30 million of us in the long term. But we're excited about having the right guy. We think that he's going to be able to build this for us going forward. And hopefully, on future calls, we'll be able to share with you how that business is growing in the future.

Ethan Star

Okay. And what are your goals this year for Kiva and Mosey?

Greg A. Tunney

That's a good question. I will tell you in the last quarter, we really kind of just spent the time with Kiva and Mosey, starting to put them on our systems and really just kind of blend them into our organization, if you will. On the Mosey side, that included also the sourcing part of it, and so that has now merged over to our R.G. Barry sourcing platform in China. So it really helps us own our sourcing, whereas we were using an agent before, and now we own it. So we think long term, the savings there, we think, are pretty significant going forward and it helps us build that foundation for a bag coalition. But the one thing I want to make sure everybody understands on, on Mosey and Kiva, is in the fourth quarter this year, it was really about transitioning them into R.G. Barry. This year, we're really taking a very holistic approach to those brands. We'll be investing in those. I don't see them, those brands, being contributors to the bottom line for R.G. Barry in our fiscal year that we've just started here. But we believe that those have potential and will add in years to come. But it's really about setting the agenda and really setting the future for those 2 brands. They're pretty small in relative size to our other companies or other brands, but we do not see them being contributors, positively, to the bottom line in 2014.

Operator

[Operator Instructions] The next question comes from James Fuld from Fuld Corporation.

James Fuld

JCPenney, men's, women's, transition of new management there, change of direction, how does that impact to you? And can you get the men's business back?

Greg A. Tunney

Yes. Good question on JCPenneys. First and foremost, I will tell you that the changes that are going on there with management, we believe, are good, and are good for our company, especially. I can tell you that since recent conference calls that we've had, we have picked up additional shelf space. They have allocated the entire replenishment business over to us. We used to share that with a competitor. So I think as far as market share in a critical area, we see opportunities there. We recently have been asked to help them. They had that strategy of cleaning up the aisles and everything else. We recently, just in the last week or 2, have been asked to help them implement really seasonal merchandise for holidays to maximize those on the aisles, and so we're helping them implement displays to do that. So we feel pretty good about that. I am going to be there next, let's see, in 2 weeks on Friday, and we're actually implementing a sub-brand with Foot Petals into JCPenneys, which we have not had before, so we feel pretty good about that. And then last but not least, we actually just got our toe in the door looking at doing some jcpenneysmens.com, which will be our first step. And then hopefully, that will help us get into the men's business for next year. I think one other question, Jim, and I'll let Jose discuss it, in regards to credit and how we see things are going with them, because I -- we have had some other questions on them in regards to that. So Jose, why don't you take a few minutes of that?

Jose G. Ibarra

Sure, and I know it's been in the press for some time. And like we do for all customers, and Penneys is an important customer of ours, so we've been monitoring and watching their status with respect to liquidity and everything else. And I'm pleased to report that -- so yesterday, we're very current with the account. We have no delinquency of any -- concerns of any sort, so very, very happy with that part of our business. And like I said, Penneys is an important key customer of ours, and we'll continue to support and work with them in the future.

Greg A. Tunney

So I guess to answer your question, Jim, based on the last 18 months, we feel better about them today than we have in the last 18 months.

Operator

And the next question comes from John Curti of Singular Research.

John H. Curti - Singular Research

A couple of questions. The first one with respect to the Footwear business and kind of the outlook for the first half of the year. We're almost through the first quarter. I know you can't say too much, but can you talk about maybe just kind of the tone of the business versus this same time last year?

Greg A. Tunney

Yes, that's pretty easy to do. If you heard my comments, the last part of it, we gave a little bit of flavor of how we're looking at our Footwear business going forward. For the quarter, when we ended up the quarter, this past fourth quarter that we just finished, we saw a lot of shifting between our different customers. As retailers have some struggle amongst them on inventory, we really saw a lot of different maneuvering between the retailers. And we saw some retailers moving inventories up and us trying to respond to that. And we actually saw one of our more significant customers push one back because their total inventory at store was difficult, so they asked us to push something from a June shipment into August for them, which we were able to do. So I would tell you right now, first and foremost, there is a concern of what's going on in the overall retail environment. It looks to be as not as robust as everybody would hope it -- they would come out of it. And there's some inventory -- excuse me, retailers out there with some, I think, heavier-than-expected inventories. So we're going to have to really be working with them to make sure the flow takes place. We are seeing goods flow that, that isn't an issue. And we think for this quarter that we're in right now that goods should flow. But I think last year, a lot of people don't remember, John, that the holiday season last year, especially in our category and others, retail was difficult during the holidays. And we did not have as our, if you will, our historic sell-through amount. So we think that there is some opportunity to pick up there. We have had some early delivery on some of our newer products that looks pretty good, and we're actually looking at some things that we can go back in and buy on based on those early sell-throughs. But I think the Footwear division, the real story for this year is profitability will be up over last year, but sales will really be more of a flat to single-digit growth rate that we see for the year.

John H. Curti - Singular Research

And the profitability being higher relative to the year that just ended, the elimination of the lower margin programs?

Greg A. Tunney

Yes. As you start to distance yourself from that, we should start to see the uplift of what's going on with their margin progress, which is one of the reasons why we made that strategic decision. Now there was businesses there that we felt long term were never going to reach the gross margin benchmarks that we've set together for this organization. And it's interesting, John, you can go back, just not this year. But just go back 1 other operating year to 2011 and you look at the third quarter, the fourth quarter of that year, and our operating margins were in the 36% range on gross margin, which today, we were coming out of it. And with all the ships that we had, and we're above 40%. And for the year, we're, on an annual basis, now we're at a 43% range plus. So that was just a strategic decision, because we knew those businesses would never reach it. So as we exit out of those and focus on our own brand, we just see that margin opportunity expansion taking place.

John H. Curti - Singular Research

Then with respect to acquisitions and kind of the broadening of the, I guess, of the filter to look at some international stuff, et cetera, are you seeing lower prices for stuff overseas than you are here? You mentioned private equity driving up prices here.

Greg A. Tunney

Yes. I mean, the M&A market is very cyclical, as you know. And in our kind of world, they kind of bounce around between, on a nonrobust market they may be in the 5 range multiple, and when the market gets very robust and frothy like it is right now, it can hit as high as 10 plus. And right now, we're in one of those cycles. And so, if you look at us, if you look at a company such as Steve Madden, who was very active in M&A, they really sat on the sidelines because the prices are -- the multiples are too high right now on the marketplace. So we have looked at other opportunities. We are seeing that, for example, from a European standpoint, that the multiples are a little bit less. And more strategically for us, they help us exploit the opportunity to go international a little faster if we could find the right acquisition to do that. And then also, the growth that we're seeing in e-tail, in the long-term perspective on eTail, if we could find the right partner to acquire it or has expertise in that area and are selling products in our zone, we think that makes a lot of sense. But we're still staying very conscious about our filter and it's still got to make economic sense for us to do it. So I wouldn't want, just because we're opening it up a little bit, I wouldn't want anybody to feel that we're out there pushing the red line, if you will.

John H. Curti - Singular Research

Okay. And then a couple of questions for Jose. What was CapEx for the year? And what will CapEx be for the upcoming year?

Jose G. Ibarra

Pretty much the same, John. We're at a point where we're about $1 million from year to next. Last in '12, we had a bit -- we drew CapEx, $1.5 million, because of our ERP system. '13, up about $1 million. Next year, just the same.

John H. Curti - Singular Research

And anticipated tax rate of 38%, 39% for the upcoming year?

Greg A. Tunney

Yes.

Operator

[Operator Instructions] We have a question from Walter Winnitzki from Dover Road [ph] Asset Management.

Unknown Analyst

A question on free cash flow. For the full year, what was the free cash flow before some of the dividends and some of the other stuff? And second part of that question is, given what you're saying about the profitability in footwear going up, and I would sense that with the Accessories business, which is a higher-margin business growing faster, that should have a favorable impact on free cash flow, and free cash flow should grow in excess of sales this fiscal year.

Jose G. Ibarra

Our operating -- cash from operating activities was $9.6 million. I don't have the free cash flow number handy with me. But you're right, with respect, Walter, of how this business is going to move forward, we should be gaining a little bit of a lift and leverage as we make our Footwear division for that matter more profitable. So that's how we're viewing in terms of next year and the years ahead.

Operator

[Operator Instructions] You have a follow-up question from John Curti with Singular Research.

John H. Curti - Singular Research

In the absence of a completion of an acquisition, will you just continue to build the cash on the balance sheet? I know your debt is very low-cost debt, so it doesn't make a lot of sense to pay it down.

Greg A. Tunney

Yes. If you look at -- I'll let Jose make a few comments in regards to that and a little bit about what we're looking at. One thing, John, that I will tell you is, as we've been involved in the acquisition process, we did Baggallini. And Baggallini at that time was a $20 million business and Foot Petals was even smaller. And as we've gotten into this a little deeper, we're looking at acquisitions that are more in the $50 million, $100 million, even $150 million range that we have been looking at and quite active in, quite frankly. And for whatever reason, weren't able to get those deals done. So first of all, when you look at the cash that we have, because we are a growth company, because we are an acquiring company, the cash really isn't as big as you might think it is. One thing that's kind of interesting to watch is a lot of our peer groups right now, they are out there. And because of the multiples and they haven't been able to get deals done, they're buying back a lot of their stock right now. Because of our liquidity, the board doesn't feel that, that's appropriate for us. But that's what a lot of our peers have in place and are taking advantage of that. But I wouldn't want you to think that there isn't good use for that. And we think that we're going to need that as we look at more robust opportunities out there and really just bigger size deals that are really starting to come to our plate.

Operator

The last question comes from Paul de Jour of Uniplant [ph].

Unknown Analyst

I just want to ask a question. We focus so much on Penneys, but can you give us any idea of how things are going at places like Kohl's, Walmart and also more upscale retailers?

Greg A. Tunney

Yes, sure. I guess, first and foremost, to talk about Kohl's, Kohl's is another area where we are picking up market share. We have a very robust testing program there that we've implemented for our seasonal program and have already started to make action plans based on those testings. At Kohl's, we will also have our -- we have a full men's test that's going in there that we're very excited about. We haven't been in the men's program there, I think, in 7 or 8 years. So we were able to get a significant program put in there, and so we're pretty excited about that. And I think, quite frankly, Kohl's has had 2 tough back-to-back holiday seasons. And quite frankly, I think, with the new accessory team that we have there in -- at Kohl's, we're pretty optimistic about what's going to happen there this holiday and are really geared up to make it happen as the traffic comes into that store. I think the other question you asked is in regards to the upper tier and what we're seeing in that. I think we feel pretty strong about that, too. One of the key upper-tier customers that we have, we used to share that business. And as of this December, they will be throwing out the competitor there and we'll take actually that whole business over. And I think when we get to the first quarter, I'll share with people who that is, because it's competitive information. But we're pretty excited about that, we've just got that in the last 2 weeks. But right now, on the upper-tier end, we're seeing it being a little bit more robust than what we're seeing in the middle. The middle seems to be the weakest. We see that on the mass, when you look at mass and discount right now, those seem to be kind of holding their own. But it's really the middle that's pretty soft right now. And the question is, is out of JCPenney, Kohl's and Sears, who's going to end up surviving through that and who's going to actually start growing once again.

Operator

And we have a follow-up question from Ethan Star, a private investor.

Ethan Star

You already mentioned 1 new store that's taking Foot Petals derivative brand. But how are Foot Petals and Baggallini doing as far as more doors -- expanding number of doors and more retailers?

Greg A. Tunney

Yes. I think that, first of all, when you look at Baggallini, their store count and what they're trying to do right now, it continues to grow. We see it on an annual basis. I mean, if you look at it, their business has grown almost 50% since we acquired them 3 years ago. And so, when you're looking at that, their doors are growing. Probably the biggest category that they're growing in is in e-commerce. They had significant growth this year in e-commerce. They have a, as you know, a new full priced -- pricing policy that's in place. And that e-commerce business has really taken off and especially in the travel area, which is expanded with those areas. So it may not be the traditional brick-and-mortar stores that you're seeing as much growth from as you are seeing significant e-commerce accounts that have started to become $1 million, $2 million accounts for them. So we're pretty excited about to what's going on with that. And then in Foot Petals, to answer your question, they put in a major program in Bon-Ton department stores, which has been absolutely sensational. And they've more than achieved their plan and are really growing, expanding there. They're growing and expanding in Belk's department stores, another successful program that is there. I can tell you that the Macy's program has been outstanding, it continues to grow. And then some of the sub brands that you referred to, even our Target business for this early season, they're already up 10% with Target, which is a pretty mature replenishment business, if you will. And so far, their replenishment has been really good. Probably the biggest thing that we're waiting for on our whole Foot Petals launch is this new Technogel. It's something proprietary to us in the marketplace. We own it, it really takes it to a whole new level, different price point. And that starts to get launched at retail in November. We've already gotten our first order from Nordstrom's on it and will hit the marketplace. So I think, Ethan, you'll continue to see a balance of not only store growth for Baggallini or Foot Petals, but also product in category expansion as well.

Ethan Star

Okay. To what extent do you measure brand awareness? And if you do, how is brand awareness with Baggallini and Foot Petals growing?

Greg A. Tunney

We do consumer analysis on that. And for competitive standpoints, we don't publicize those. But we're doing panel research on that on a regular basis with NPD, and I can tell you that it continues to grow on both of them. And our focus on both of those brands is that's where we -- you see our investments. And you'd talk about investments, that investment spend to grow consumer awareness and to really get aided and unaided awareness up. It takes investment, and we'll continue to do that and continue to spend that money, because the margin and the growth that we're getting from those brands make sense for us to make those investments long term.

Ethan Star

Okay. And you mentioned the Technogel with the Foot Petals. And is that something you acquired or you bought a patent on, or is it patented?

Greg A. Tunney

It is patented. It comes out of -- it's a license that we have. It comes out of Germany. It's a state-of-the-art company that actually does medical devices and uses the same technology. And we actually have the license for North America and have the exclusivity on that. So as much as the market has talked about gel, we have Technogel. And the biggest difference between it is most gels are petroleum-based products. Technogel is a water-based product and performs in a much higher level as far as comfort, resiliency and durability. So we're pretty excited about what it represents to the marketplace.

Ethan Star

Great. Then I suppose -- I guess, it also means it's less expensive, this is not petroleum-based.

Greg A. Tunney

No. It's actually more expensive just because of the technology involved and everything else we're using with it.

Ethan Star

Okay. How are the Dearfoams brand, the licensed pajama and bedding products doing, retail?

Greg A. Tunney

We continue to have a good relationship with our partners that are doing that and they continue to grow year-over-year. We appreciate the relationship we have with all of that, and we're actually working with them right now on how we go forward and how we help them continue to open up new doors and expand that licensing agreement. But if you really think about it, Ethan, what we're trying to do with Dearfoams, that brand is all about comfort. It's synonymous with comfort. We find that out time and time again with our consumers. And for us to get into these various categories that respond to comfort, we see that, that's an opportunity to invest in and really kind of build the category of Dearfoams around the idea of comfort in those key categories where we can find key partners that can drive that business.

Operator

And we have a follow-up question from John Curti with Singular Research.

John H. Curti - Singular Research

I had just a question on Baggallini. If you could talk a little bit about the market segmentation strategy and update there? And what's planned in terms of further development of that strategy?

Greg A. Tunney

Yes. What we see with Baggallini is with something like Dearfoams, we have a lot of, if you will, we're in a lot of doors. We have a lot of exposure to the brand, a lot of different channels, so we really have to manage that brand segmentation from it. I think with Baggallini, we've only touched the surface, and our goal there is that we really want to make sure we build this for long-term sustainable growth, and quite frankly, on a non-promotional brand. And so this last year, we learned some things when we went into different department stores. We learned that the model that we use with independents and dot com necessarily doesn't work with department stores that move a little faster and need more color in the mix. So as we start to expand out, I think, quite frankly, John, our ability to drive new categories, new products and expand upon that is really where the opportunity with Baggallini is. We don't see a need in the immediate future right now to provide growth through sub branding or getting into maybe promotional channels. But we see, for example, in the travel category, a big opportunity to go out there and to really solicit this. We have department stores that have asked us to, could we put a collection in the travel departments versus just the handbag department. And so I think that's where you'll see more of that exposure going on. But for right now and for the near future, we see the whole focus being on Baggallini versus sub brands at this point. Next week is their big sales meeting, big kick off for the upcoming season. And so I look forward to being there with all their associates and keeping you guys up-to-date in our next call.

John H. Curti - Singular Research

So would it be fair to say that the department store channel may be a little more promotional than you envisioned with the type of product that you want to put into those stores?

Greg A. Tunney

Well, I think that, that's a fair comment. We get concerned when our brand gets footballed around. So for them, wanting product that they can promote, we know we've pushed back from that and aren't as interested in it. But I think, more importantly, was the rhythm, the cadence, the timing of that department store business and us to have goods that are flowing like that versus -- one of Baggallini's real value propositions is the ability to replenish on a regular basis on true basics and true core items. And that did not resonate as well with the department stores as we had hoped.

Operator

And we have a follow-up from Walter Winnitzki with Dover Road [ph] Asset Management.

Unknown Analyst

Just wanted to go back to the financials relative to the Accessories business. I don't have that Q out now, but the quarterly growth in Accessories, does that look to be, if I'm doing my arithmetic correct, now over a 20%? And that would imply a significant acceleration from under the 10% that we saw at this time a year ago, so I guess that business has really been seeing the signs of the investments that you've made of paying dividends at this point. So I'm wondering if that's correct. And I assume that Baggallini is kind of in the driver of that. And looking out to next year, given your mid-teens growth, would it be more balanced with Foot Petals picking up some of that growth as opposed to this year being more Baggallini driven?

Jose G. Ibarra

That's correct, Walter. We see next, going forward, more like a mid-teens growth rate for that accessory group. And there's years where 1 or the 2 get a bit ahead than the other. But when you look at them as a group, I think it's important to speak in terms of, if you want to do some modeling, to mid-teens growth rate for them. The 18%, 19%, whatever we call it, that we grew year-over-year with respect to that Accessory business is a bit on the high end of the range that we're planning with or working with. We will welcome that any time, but we've got to be mindful and then careful that there's sort of balance between that and managing the gross profit and the operating profit of those 2 businesses. And then that's what we do. We rather stay with that mid-range, mid-teens, growth rate and be able to achieve the profitability that we expect for these 2 businesses.

Unknown Analyst

Agreed. It looks like you had a good -- what was the quarterly growth in accessories this quarter, year-over-year?

Jose G. Ibarra

I don't have it handy, but I can tell you that the '13, the last quarter for accessories was very robust. We got into a very nice number for the quarter. Combined, Foot Petals and Baggallini, I think, was $11 million that we quoted. That was a very good quarter top line. There were some shifting where the product went and kind of speaks to what we had been talking about in terms of distribution and whatnot. So we want to be very careful that as we look to the future, we don't set the expectations by ourselves and the rest of the audience that, that's kind of the growth and the going rate for that accessory group. But yes, we do welcome the other side of the question, the invest spending that we've done in that -- in those 2 businesses are beginning to pay off nicely for us, whether it's the Technogel on the Foot Petals and some of the things that we do with Baggallini, very, very pleased from a return on capital, deploying capital, to be able to fund those businesses in the right way. I couldn't be any happier in terms of what they had given us back 2.5 years since we bought them. So we continue to be very pleased and will work with management and the unit presidents to make sure that we continue to be in the right track.

Unknown Analyst

Okay, terrific. Looks like a good return on capital relative to those 2 investments, terrific.

Greg A. Tunney

Yes, indeed.

Operator

And there are no more questions at the present time, so I'd like to turn the call back over to Mr. Tunney for any closing remarks.

Greg A. Tunney

Thank you. And thank you, everybody, who participated in the call today. Fiscal 2013 reaffirmed the stability of our business model even when facing some economic and retail volatility. We turned in a solid, best-of-class performance and begin our new year well positioned for resuming our pattern of consistent profitable growth. Many of you asked me questions about how we think the economic or retail environment will look. Quite frankly, we're just like you, we're watching it day-to-day. And all I can tell you is that we'll do as we always do based on the conditions. We'll manage the business accordingly. We invite you to join us for the 2 upcoming webcasts on Wednesday, October 30. Our annual shareholders meeting will be held at 11:00 a.m. Eastern time, and on Tuesday, November 5, at 9:00 a.m. Eastern time. We will report our first quarter 2014 results. Details on both webcast will be made available in advance of the event. Until then, thank you for participating, and goodbye.

Operator

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

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