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Costa, Inc. (NASDAQ:ATX)

Q3 2013 Earnings Call

October 30, 2013 4:30 pm ET

Executives

Dave Whalen - CEO

Kevin Mahoney - CFO

Analysts

Ronald Bookbinder - Benchmark

Joe Munda - Sidoti and Company

Alan Brochstein - AB Analytical Services

Andrew Burns - DA Davidson

Robin Murchison - Satuit Capital

Operator

Good day, ladies and gentlemen, and welcome to the Costa Reports Third Quarter Results. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions).

Before we begin, I’d like to take a moment to read the Safe Harbor statement. Statements contained on this call 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 the company’s intention to increase activity in pursuing brands to acquire that fit with the current portfolio, the company’s ability to reduce certain public company and legacy pension cost, the company’s ability to sustain the relatively low capital cost at Costa, the continued geographic and demographic expansion of Costa, continued growth in the prescription market of Costa, the anticipated continued growth of Costa’s apparel and accessory business and the anticipated continued growth due to online sales.

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 our ability to identify and acquire appropriate portfolio brands, consumers’ willingness to purchase discretionary items, particularly in accordance with our historical seasonal expectation, overall changes in our consumer confidence and/or preference, the inability of Costa to expand geographically or demographically and the difficulty associated with maintaining reduced cost.

Additionally, discussions 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 ending on December 31, 2012, and other filings made periodically by the company. The company undertakes no obligation to update this forward-looking information.

I would now like to turn the call over to Mr. Dave Whalen, Chief Executive Officer. Please go ahead, Dave.

Dave Whalen

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

We had a very productive third quarter. We divested the Cross Accessory Division, changed our name to Costa, Inc., and accelerated the top and bottom line momentum in our sunglass business. We have transitioned into a pure-play premium performance optical company and have many growth opportunities ahead of us.

In Q3, revenue from continuing operations, the former Cross Optical Group, increased 26% to nearly $25 million. On a brand basis Costa grew faster than the overall rate while Native revenue declined. The business saw growth in all segments including non-prescription sunglasses, performance apparel and prescription eyewear.

Given this third quarter performance and our year-to-date results we are raising our 2013 revenue guidance for the business from $97 million to between $99 million and $100 million. As we enter the last quarter of the year, our confidence in the Optical Group's business model and growth potential is high as our authentic brands and products attract new consumers every day.

On September 6, we announced we have sold the Cross Accessory Division which included the Cross brand. A number of you have asked questions about the deal and our future plans through Dave Mossberg at our Investor Relations firm, Three Part Advisors. I will answer the most common of those questions now. First, one of the plans for building the Costa and Native brands going forward. We’ve 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 and driving this growth.

Our sunglass business requires very little capital approximately $2 million to $3 million per year and that level should not change dramatically. The free cash flow from the business is more than sufficient to support our growth plans. Our business as you can see from our year-to-date results has strong momentum and our focus for 2014 will be to continue that momentum.

Another question that we have received is will you look to make acquisitions by using the capital from the Cross Accessory Division sale? First, we think that the premium Performance Sports Eyewear category has great growth potential globally. We have witnessed since we’ve 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 Sports 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, a great deal of our revenue is generated in the sporting goods channel of trade and we know that we can leverage that distribution. Based on these factors we are confident that we can succeed with other brands that help consumers perform around and enjoy the water.

Our top priority is the organic growth of the Costa and Native brands but we expect to become more active in pursuing assets that fit with our brands as we redeploy the proceeds from the sale of the Cross Accessory Division.

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 Capital with a larger corporate staff that is necessary to move forward. So the best analysis is to look at 2014. For 2014, approximately $4 million in public company corporate and legacy pension cost will no longer be absorbed by the contribution from the Cross Accessory Division.

To break this down in our guidance for 2014, we are expecting our Optical Division to contribute approximately $114 million in revenue and approximately $20 million in operating margin. Including the roughly $4 million in costs, total operating profit for the entire company will be approximately $16 million. This performance should generate $0.80 per share, earnings per share.

Our entire focus now is to continue to build our performance optical company. Our 2013 revenue forecast now calls for nearly $100 million in revenue from our sunglass business which implies 20% growth from 2012. We often get asked how we will keep this momentum going? The answer is that we have a disciplined approach that not only includes store growth but also innovative programs that support organic growth with our existing retail partners. For our Costa brand we will, one, expand geographically. We are currently in about 6800 of the 10,000 retail doors in which we will ultimately gain United States distribution.

Year-to-date, Costa has added approximately 600 new doors. The Southeast, Texas and the Northeast with the areas where the most progress was made. We will continue to drive into these areas in 2014. Ultimately, of course, we are striving to make Costa a national brand.

Second, we will continue to add demographically to our great core constituency of 25 to 35 year-old male fishermen by offering new products and programs targeted at college students and coastal lifestyle consumers. In this regard for the eighth year running, our U of Blue College Tour made its way across the south this year stopping at various universities as we introduced our brand and products to a new group of potential customers.

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 to the Costa franchise. Another way that we continue to build awareness is through Costa sponsorship of OCEARCH. OCEARCH 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.

U of Blue, OCEARCH 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 know about our brand, the greater the trial and growth. We had an excellent season in this regard and we will continue to press our performance in 2014.

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 dialog with grows. This communication is being handled in a disciplined way with the goal of bringing consumers to the Costa website. This strategy is working and we will continue to invest in the site as the business 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, 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 2013 sales of these lines are up a similar amount.

Fifth, we came back with Kenny. Costa and Kenny Chesney teams up in 2011 and 2012. We did it again this year as Kenny played at 48 stadium venues throughout the country. Once again, Kenny designed limited edition of Costas that have sold out. Costa videos were played at the concerts, Costa had a presence on Kenny’s website. The association with Kenny Chesney has been a terrific one for Costa and we look forward to enhancing it in 2014. This year Costa gained over 30 million consumer impressions from our association with Kenny. 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, 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 of the optical channel of trade. In August, 2012, the Costa Rx lab opened. It is a state-of-the-art 10,000 square foot facility located next door to Costa’s main facility in Daytona Beach, Florida. 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 24% and we expect that rate to continue next year.

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 mountain. Native has had an off year with business through Q3 down 3%. We believe that the product is strong and the brand positioning is correct but we've yet to gain the critical mass of distribution necessary to drive meaningful revenue. That said, we still believe that Native can become the brand of choice for mountain sports consumers. As we build our 2014 plan, we will review the status of Native and work to create door and revenue growth from the start.

Our sunglass business is an excellent business. It is growing fast in a disciplined way, it is gaining share, it utilizes capital efficiently, it has many avenues for growth. 2013 is concluding as another strong year where we will see powerful growth from the business. We are excited about the potential of our Costa and Native brands and we think investors should be as well.

Now I will turn the call over to Kevin.

Kevin Mahoney

Thanks, Dave. Okay. Let me cover our third quarter income statement first. Historically, the previous A.T. Cross Company’s consolidated results included results for both of the company’s previous operating divisions, Cross Accessories Division and the Cross Optical Group. Also historically, we have separately presented the revenue and operating income performance for both of those two segments.

As a result of the divestiture of the Cross Accessories Division in September, 2013, we are now presenting the Cross Division as a discontinued operation in our historical income statement results. Also as Dave noted, certain costs previously captured in the Cross Division will continue to be incurred by the company or Costa, but will no longer be absorbed in the Cross Division.

Our income statement results for continuing operations presented this quarter include both the previously reported Cross Optical Group as well as those costs previously included in the Cross Division but no longer absorbed by the Cross Division. I will provide some details as to the earnings performance of the former Cross Optical Group this quarter on an as historically reported basis in just a minute.

Okay, so now some comments on our results from continuing operations. And keep in mind when I mention results for Costa, our new company name, it includes the activities for both our sunglass brands. As Dave noted, our revenue performance was strong in the third quarter up 26% and year-to-date through the third quarter Costa revenues were up 21%. Costa’s gross margins were 58.6% in the third quarter and 58.9% year-to-date. We believe our full year 2013 gross margins will be 59.3% versus 58.2% for all of ‘012.

Costa’s operating income for the third quarter 2013 was $193,000 versus $1.4 million in 2012 and year-to-date 2013 Costa operating income was $8.9 million versus $8.4 million in ‘012. Operating income for the three and nine months ended September, 2013 did include a $2.1 million non-cash expense associated with previous equity awards divested upon the sale for Cross Division in September. The operating income for Costa on an as previously reported standalone basis for the third quarter and year-to-date 2013 was as follows.

For the third quarter operating income increased 53% and year-to-date operating income increased 26%. In our press release we have reported numerous EPS data for both continuing and non-continuing operations as well as non-GAAP EPS adjusted for the $2.1 million non-cash compensation expense I previously mentioned.

Our EPS for continuing operations and adjusted for the $2.1 million non-cash charge I described was $0.09 in the third quarter of ‘013 versus $0.07 in ‘012, an increase in EPS of 29% for the third quarter. Year-to-date earnings per share of $0.50 versus $0.40 in ‘012, an increase of 25%. Again, that is our EPS for continuing operations adjusted for the $2.1 million non-cash charge I described.

Now let me highlight some balance sheet matters. First unlike our income statement our comparative 2012 balance sheet information presented this quarter is as previously reported meaning it includes the previous Cross Division. At the end of the third quarter 2013, our cash and short term investments was $64.2 million. Our accounts receivables were $12.1 million and compared to the September, 2012 balance for the previous Optical Group receivables increased 22%.

Inventory was $17.9 million at the end of the third quarter compared to the 2012 balance for the previous Cross Optical Group inventory increased 74% from a year ago. We expect our year end 2013 inventory for Costa to be approximately $17.3 million, an increase of 32% from the Cross Optical Group’s 2012 year-end balance. Our retirement plan obligations relate primarily to liabilities retained by Costa in the sale of the Cross Division in September.

Those are my summary comments for the third quarter. Now I’ll turn the call back to Dave.

Dave Whalen

Thanks, Kevin. We’re looking forward to the balance of 2013. Our business is well positioned for a solid Q4 with many accounts already placing orders for 2014 new products for the holiday season. We will enter 2014 as a company with a strong balance sheet expecting to grow our top-line at a mid to high teens rate with approximately $0.80 per share in 2014 earnings power. Thank you for listening and now we will take questions.

Question-And-Answer Session

Operator

Thank you. (Operator Instructions) Our first question comes from Dave King of ROTH Capital Partners. Your line is open.

Unidentified Analyst

This is actually (inaudible) for Dave King. If you could just update us on the apparel initiative, what percent of sales is in now and when do you expect to have a wider product offering available?

Dave Whalen

Sure. For the year the apparel and accessories business would be roughly 10% of our total $100 million business. And in each year we review the line look at the winners and how to augment them. And I think for 2014 the line will be in terms of which products we have or types of products we have will be pretty similar to 2013, and then we’re looking for 2015 to have a broader offering. So 2014 will be a year of product development of that broader offering and then move it into 2015.

Unidentified Analyst

Okay. That’s helpful. And then maybe if you could just talk about how sell-through has been for the Costa brand and maybe your plans to drive growth in the Native brand and how you plan to increase distribution there?

Dave Whalen

Well, sell-throughs for the Costa brand has been very strong. Sell-through as I mentioned, Native brand is off about 3% year-to-date so the growth in the business that you’ve seen is been driven by the Costa brand and the brand is performing very well in just about all areas.

In terms of the Native brand, we have -- we continue, as I said, to believe the product is right, the position is right. We have programs in place that we’re looking to gain more doors both within key accounts which we think is the key where we have tests right now, but unfortunately the tests have not been expanded or the doors have not been expanded. The tests are going well but the doors have not been expanded and we’re hoping to get that to happen in 2014, and to get some better performance out of our independent account base. We did increase doors this year, we’ve increased our Native doors by about 150 to 170 doors but we need more in order to make that brand really catch hold. So it will be a focus for 2014.

Operator

Thank you. Our next question comes from Ronald Bookbinder from Benchmark. Your line is open.

Ronald Bookbinder - Benchmark

Good afternoon and congratulations once again on the sale of the accessories. When you talked about acquisition of Performance Eyewear brand, why would you look to that so quickly when Native is -- still has to really ramp up?

Dave Whalen

Well, that’s a good question, Ron, because I hope I didn’t give the impression that we would do any acquisition quickly. We were very disciplined about it. I think what I meant to convey was we think the space is a very productive one and we will look at assets within that space that could augment our portfolio. But as you know, each brand has a different story to it and can help in a different way. So we will look into this space because we think it’s a growing one and a productive one. We won’t rush into it and we will certainly learn from some of the things that we’ve seen with Native and that would certainly help our assessment of any acquisition we would make in the area.

Ronald Bookbinder - Benchmark

With the Native brand are you sponsoring any sports or sporting events, and are they producing any results like the events that you do with Costa, you are doing anything there?

Dave Whalen

We do sponsor some events on the mountain, in mountain communities or in the mountain areas to help build awareness of the brand, but they are not on the scale of what the Costa brand does because Costa is so much bigger than Native and is involved in larger events. But we have -- we’re trying to use a similar formula that works for Native, Costa on the water, for Native on the mountain. I think generally consumers what we see is consumers like the product, consumers respond to the product and the marketing. It’s just not available on a wide enough basis yet to have a strong impact. So I really think the job is more doors and then as we get those doors help to build awareness through our website, through events, through advertising, but it’s a job that we have to continue to focus on and will be a focus of our '14 planning, what are the programs that are going to make this brand go.

Ronald Bookbinder - Benchmark

Okay. And lastly, with the influx of cash, are there any areas of the business whether it’s prescription, apparel, Native that were under funded before that could receive more funding and that we could look for an acceleration in?

Kevin Mahoney

It's Kevin Mahoney. I think any near mid term strategic growth initiative that is in front of us for Costa or Native anyone really that’s near or mid term can be funded by the cash flow that the -- that that business throws off. So there really are no constraints from a capital perspective, they can self -- that business can self-fund from a perspective cash flows, as I said, any near or mid term strategic opportunity they are pursuing or going to pursue. So --

Ronald Bookbinder - Benchmark

Okay.

Operator

Our next question comes from Joe Munda from Sidoti and Company. Your line is open.

Joe Munda - Sidoti and Company

I guess my first question is for you Dave. You had mentioned Native doors being up 150 to 170. So we get a full door count?

Dave Whalen

Today Native is in about 1200 to 1300 doors.

Joe Munda - Sidoti and Company

Okay. My other question about acquisitions, I know you won’t get too much into it, but I was wondering if you guys actually took a look at the Rebo deal and what your thoughts were?

Dave Whalen

I wouldn’t comment on that, Joe, in any sense whether we looked at it or my thoughts on it.

Joe Munda - Sidoti and Company

Okay, fair enough.

Dave Whalen

Other than to wish the company to buy it with luck.

Joe Munda - Sidoti and Company

Fair enough. Also I was wondering if you could break out percentage of sales what the website contributed as well as prescription?

Dave Whalen

Both of those were around 5% of the business.

Joe Munda - Sidoti and Company

5%, okay, perfect. Thank you. And then I guess my next couple of questions for Kevin. Going forward on the P&L statement, okay, I understand that $2.1 million gets backed out through the P&L, but going forward in the fourth quarter how should we look at operating expense? Is it going to be somewhere similar to what it was in the third quarter ex that $2.1 million or are we going to see a continued -- is there another stock option reward or equity reward going forward?

Kevin Mahoney

I think the expense level in Q4 will be similar to expense level in Q3. There are equity rewards that could accelerate based upon achieving performance objectives. If we achieve those performance objectives they -- that additional earnings or revenue would probably offset the expenses associated with the incremental incentive compensation. So I think I would describe Q4 spending or operating expenses -- we think they would be similar to Q3.

Joe Munda - Sidoti and Company

Okay. And can you guys touched on the capital need to run the business assuming CapEx of roughly $2 million to $3 million. Is that correct in that assessment?

Kevin Mahoney

Yeah, that’s correct.

Joe Munda - Sidoti and Company

Okay. And what was the operating cash flow for the nine months?

Kevin Mahoney

Well, I mean it’s -- I think we’d have to do -- Joe, given all the activity in the year I think we could have to do is take a look at -- I don’t have that for you, okay. So I think if you wanted to look at what the cash flows of the business are I would look at our projected operating income for continuing operations for the full year. And there will be a modest -- the depreciation and amortization for continuing operations you’d add back and then a modest deduct for working capital growth, I don’t have that number for you for continuing operations for the full year in front of me. That’s the number that’s important. I can get it back to you after the call.

Joe Munda - Sidoti and Company

No problem. And then I guess, Dave, back to you last question the revenue guidance projected up from $97 million to $99 million to $100 million. So I know you are coming into probably a core or peak season for Native. Are you expecting it to turn around this quarter and see growth and is that why you’re upping the guidance?

Dave Whalen

No, no, I would -- I expect Native to continue around flat. The growth right now is being driven by the momentum in the Costa brand.

Operator

Thank you. Our next question comes from Alan Brochstein from AB Analytical Services. Your line is open.

Alan Brochstein - AB Analytical Services

I just had a few questions. The first one is I just want to make sure, Kevin, I understand the Q3 EPS you did a good job of breaking up equity compensation but am I correct that there was probably $1 million based on your $4 million per year of operating expenses, is that the right way to look at it from the continuation of cost?

Kevin Mahoney

Prospectively, yes. I think that is comprised of approximately $3 million of real operating cost that will no longer be absorbed the Cross Division and a projected $1 million for pension expense. Now that could come down as rates arise and asset returns get better than they have been over the last recent period of time. But the composition of that $4 million is $3 million real operating expenses and $1 million projected for pension.

Alan Brochstein - AB Analytical Services

So when you talk about the $0.80 next year that kind of includes the disappearance of all that or just moves out?

Kevin Mahoney

Well, the $0.80 is the former Cross Optical Group business which is the Costa and Native brands. It is their operating income less the $4 million.

Alan Brochstein - AB Analytical Services

Okay. So --

Kevin Mahoney

Okay. So that operating income was what drives the $0.80 EPS.

Alan Brochstein - AB Analytical Services

Okay. And then also I know you guys have talked about this, I just want to make sure I understand this. You’ve publicly stated about having $5 per share of cash by the end of 2014, and I just want to make sure that I understand that you have some debt on the balance sheet now. Is that $5 cash exclusive of that or inclusive, the debt could be there?

Kevin Mahoney

The $5 per share at the end of ‘014 is net cash, cash less debt.

Alan Brochstein - AB Analytical Services

Cash less debt, okay, all right. And then on the inventory number switched today, can you give any more color on what’s going on with that inventory? I’m kind of surprised to see it so high, I’m wondering what’s driving that?

Dave Whalen

We don’t want to miss the sale and all of our inventory is good inventory and it’s turning well and we have -- we’ve had a business that’s grown 20% this year. So we’ve grown our inventory at least by that much and then as we’re beginning to build new products for 2014 which the season or at least the -- we’re getting a lot more activity in December than we use to have holiday season, sunglasses are a great gift. So our inventory is up.

Alan Brochstein - AB Analytical Services

Okay.

Kevin Mahoney

Yeah, just to add something to that, Dave, or to the person who asked the question. If you’ve been following us for sometime at least over the last couple of years you may recall middle of ‘012 into the third quarter, we regrettably had put ourselves in a position of being substantially under invested in inventory, the guidance there pretty clear.

Alan Brochstein - AB Analytical Services

Okay.

Kevin Mahoney

And so the comp if you will to ‘012 that has some distortion. As I said, our inventory level for the end of the year would be about 32% higher than last year. And if you think about our Q3 revenue performance and what we have planned for the business for Q4 and Q1 that percentage increase from ‘012 when we kind of got our inventory act together is not unreasonable. And then if you look at the total amount that we projected for the end of the year of $17 million, it represents in about three months worth of inventory.

Alan Brochstein - AB Analytical Services

Got it, okay. Thank you for that. And then my last question is on Native. Obviously, it’s been disappointing. Would you say that one of the issues in 2013 date may have been just that you are focused on the divestiture maybe, did that play a role?

Dave Whalen

No, it wasn’t.

Alan Brochstein - AB Analytical Services

No.

Dave Whalen

I wish that were it but --

Alan Brochstein - AB Analytical Services

You wish.

Dave Whalen

I think, I just think we -- as I said a couple of times I think we’ve got the right product, we’ve got the right positioning, I think we need a little to do a little better job of convincing more retailers that this is the right brand for them. And I’m confident we will do it, we have a terrific sales force and they will get it done.

Alan Brochstein - AB Analytical Services

Okay. And then I’m not sure what you, do your research, I’ve never heard this about fishing and country music, but what do people on the mountain like to listen to rock and roll maybe?

Dave Whalen

I don’t know. We’ll have to do that research.

Alan Brochstein - AB Analytical Services

So you have to get a lot bigger before we cross that bridge especially if its rock and roll I would imagine.

Dave Whalen

That’s it. Could be, not in the country.

Alan Brochstein - AB Analytical Services

Well good luck and congratulations again.

Dave Whalen

Okay. Thank you.

Alan Brochstein - AB Analytical Services

All right.

Operator

Thank you. Our next question comes from Andrew Burns with DA Davidson. Your line is open.

Andrew Burns - DA Davidson

Thanks, good afternoon and congratulations on a strong quarter. I had a couple of questions for you. Just in terms of the Costa brand, it certainly seems like that the brand awareness is hitting a tipping point or an inflection point where it has the potential to be a national brand. Are you finding it easier to expand regionally with you going into newer regions now that the brand seems to at least the niche brand or better in every market in the country at this point?

Dave Whalen

Well, I think, Andrew, I think we have seen awareness grow and we’re seeing awareness grow both in the core markets of the southeast and in some markets outside the southeast. I think we have to work, we certainly have to work harder in the areas outside the southeast where we’re not as well known, but I would say in the places that we focus like I know you’ve been watching us for a few years now, we’ve seen a steady increase in the awareness of the brand in Texas where we’ve had a big initiative. And as we move and focus on different states we find we do a very good job of gaining distribution and awareness. So, I would say we’re seeing our awareness rise in the south and to some extent outside the south off of a lower base. I don't know if that answers, fully answers your question but that’s kind of how we see it. And when we go to trade shows we do versus two or three years ago we certainly get more visitors from outside the southeast stopping by the booth and inquiring about the brand. But it's building distribution, building national distribution in a disciplined way as a process and we’re sticking to our process and its working.

Andrew Burns - DA Davidson

I guess to that comment where buyers from outside regions that you normally sell and coming in and inquiring about the brand wasn’t sure if its the awareness and the popularity of the brand might cause you to accelerate the regional expansion plans somewhat just given the momentum?

Dave Whalen

I think we’re on a pretty good pace. I think we’re on a good pace we’ve been -- you’ve seen the growth in the business. We’ve been -- the door growth has been between 500 and 700 every year and I think one of things we’ve been very cognizant of is not to get too far out in front of -- to get out distribution too far out in front of our awareness because we really want to make sure that we can do a good job at retail for, for our retailers and that means not just setting up the store and having it look great but making sure consumer are aware of the brand and come in and purchase the brand. And that takes investment and I think the path we’ve been going on is a good one. I think its showing up in the top line and I think, as you think about us that type of door growth or distribution expansion is probably what should be counted on per year going forward.

Andrew Burns - DA Davidson

Okay, thanks. And then with Native it certainly seems like the product looks great particularly the Odyssey line and the brand stories is where it needs to be. Yet, the revenue growth even with door growth just hasn’t materialized. I'm wondering if its just not the right doors, are you thinking about the channels that you sell into just trying to get to the disconnect and to reconcile between what looks like your confidence in stronger product relative to the performance?

Dave Whalen

Yes, I think we’re in the right channels. I think we’re in the sporting good channels, we’re in some of the -- we’re certainly some of the larger retailers who you would consider mountain retailers such as REI. I think its -- but I think we need more of them I think we need a greater penetration of those chains, those sporting good chains, and quite frankly we need to find a way to make people more aware of the brand and its features and its benefits. And we haven’t been able to do that yet. We’ve done it, I guess I would say we’ve done it in pockets you can -- when you look at the Native brand you can see pockets of success where the brand is growing well but there were not enough of those and we need to find a way to expand those areas of success to a broader group of customers. So clearly we haven’t found the answer but we think it’s a good asset and its one that eventually and we will succeed with.

Andrew Burns - DA Davidson

Thanks, and last question just on the cash position. You’ve given some targets around year-end cash and didn’t know if there was a tax liability to be paid 1Q 2014 first half 2014 relative to the CAD divestiture? Thanks.

Kevin Mahoney

Sure. The question was asked as to where we expected cash to be and I gave that, Andrew. There were as we -- there are no additional taxes that we associated with the CAD divestiture at this time. Matter of fact I think there are some sizable deferred tax assets that we’ll bring forward in 2014 and that our book provision that we plan for the year for 2014 of $6 million or $7 million actual cash pay will be an awful lot lower than that.

So if you look at that balance sheet that the company is the press release you see the deferred tax assets. There looked greater deferred tax assets that are not reflected on the balance sheet that will reduce the taxes paid. So 2014 a little bit in 2015 actual taxes payable would be substantially less than our tax provision.

Operator

Thank you our next question comes from Rob sorry, Robin Murchison from Satuit Capital. Your line is open.

Robin Murchison - Satuit Capital

Hi, thanks. Good afternoon, I just had several questions here. One was on the inventory, is there, is this all finished goods inventory or is it, can you break it up?

Kevin Mahoney

Yes, by and large, it is the Costa product we have lenses and we have frames and we assemble those, but in terms of raw inventory and working process we by and large purchase finished product.

Robin Murchison - Satuit Capital

Okay, so it is largely finished goods inventory, okay. And then also, I thought you said in opening comments that diluted or non-GAAP diluted EPS was $0.09…

Kevin Mahoney

$0.10 excuse me its $0.10.

Robin Murchison - Satuit Capital

May be I misheard.

Kevin Mahoney

No excuse me, $0.10.

Robin Murchison - Satuit Capital

Okay.

Kevin Mahoney

I'm sorry if I said $0.09.

Robin Murchison - Satuit Capital

Okay, maybe I misheard. Okay and then lastly while it, I realized on Native it's too soon you probably don’t have enough critical mass to go down the path of a celebrity endorsement. But would it be something that you would look at it some point in time for Native? Would it help it?

Dave Whalen

I think the way that Costa started out was really to get endorsement in the community first with, in Costa’s case, it was highly skilled fisherman and those people were skilled and known within the community. So celebrity from the sense of they are known on the mountain as people who play on the mountain. Yes, that could work but right now I don’t think the brand has the scale for that. I think it has to be done more in terms of making people aware of the brand and its features and its benefits and why it works and why it works on the mountain, and so that’s I think a celebrity endorsement of whatever kind is a few years off.

Robin Murchison - Satuit Capital

And more grassroots at that point.

Dave Whalen

Yes.

Operator

Thank you. (Operator Instructions) Our next question is a follow up from Ronald Bookbinder from Benchmark. Your line is open.

Ronald Bookbinder - Benchmark

At what -- with the strong growth of Costa at what point would you look for Costa to go international and would you go first to Canada and Latin America or are there exceptional sunglass markets around the world?

Dave Whalen

Well, I think certainly, yes, Canada and Latin America would be important. And we have some business now in Latin America and very little in Canada but we believe we could be successful in those markets. And in fact, Ron, we do have distributors in some other markets outside the United States such as the UK and Australia. We just haven’t put a focus on it yet because we still have most of our business and most of our distribution done in the southeastern part of the United States. So our focus will continue to be for the next couple of years expanding into a national brand in the U.S. with potentially moving into Canada and Latin America more deeply during that timeframe. But to go broadly international like some of our larger competitors I think that’s several years off.

Ronald Bookbinder - Benchmark

Okay. And can you give a little color on the build out of the apparel team, people that you might have hired what sort of background do they have and where are they going to be located?

Dave Whalen

Well, they will be located in the Daytona Beach and we’re looking for just people again who are skilled in the performance sport apparel area. We brought on somebody this year and very productive and will look to expand the -- expand the team as the business expands. Just people who have good solid knowledge about how to evaluate a line and expand the line, as I said, with the target of a greater more expanded line in 2015 developed in 2014.

Ronald Bookbinder - Benchmark

Okay. And lastly on prescription, what is it going to take to get that to ramp up faster and get it to the percentage where other sunglass brands are? And can you get eye care professionals to promote the brand? Can you give them some sort of commission or sponsor them somehow? How does that work?

Dave Whalen

Well, the brand is ramping up at a rate of 25% growth a year and that’s what we’ve projected for next year. I think the first step with eye care professionals is to go in and get distribution of the product and make them aware that Costa is now available in prescription. We have about 2,000 doors. Some of our larger competitors or our next largest competitor who we view as our next largest competitor is in about 7500 doors so we need to -- that’s an area where we can continue to expand. And it's really making the doctor or the ECP aware of our program, aware of our product and to recognize that Costa is now available in prescription and why they should talk to their patients about it. So it’s a process and actually we feel pretty good about the way we’ve established the business and the kind of steady growth that we’ve seen and we believe that as well make more ECPs aware of the product we will continue to see the business ramp up successfully.

Operator

Thank you. Our next question comes from Robert Meeder from UBS Financial. Your line is open.

Robert Meeder - UBS Financial

And things seeing to be going great with Costa guys. And you have a real phenomenon going on with this brand. And I got tuned in a little bit late because of operator issues. But with all this capital and the inherent risk of buying a new brand or getting into a new business adjacent business, are you considering may be using more those capital for stock repurchases as you have in the past or a faster build out of Costa?

Dave Whalen

Good question, Bob. I think we’ve been very successful with our stock repurchases in the past and we’ll certainly consider that going forward. We have -- our board has about a faith in what we’re doing and we’ll consider that going forward.

We’ve been asked the question about whether or not we would use the cash on the balance sheet to grow Costa and Native and the answer has been that the cash that the business generates is sufficient to fund the growth plans we have for the business. So we won’t have to dip into the cash on the balance sheet.

And as for acquisitions we’ll be very careful, very disciplined. What I’ve said is we think the performance optic sunglass optical space is a very productive one and will be one going forward. So if we’re going to be a player we would look at assets in that area. But certainly learning from our Native experience and making sure we go about in a disciplined way. Primary job here is to organically grow the company and that’s what we’re looking to do.

Robert Meeder - UBS Financial

And as far as Native goes I don’t know if you’re used to give kind of operating margins for that. But I guess my concern on Native and maybe future acquisitions is when you go into a door and it doesn’t work in that door discontinues carrying your brand then are you kind of shut out of that market? And its sure harder to get a customer back and with Costa you’ve got this incredible momentum where probably doors when you knock on them said, oh, yeah, I’ve seen those guys, I’ve seen your stuff, I need to carry it?

Kevin Mahoney

It's Kevin Mahoney. The question I guess is in the context of I guess the wisdom pursuing acquisitions. I guess a couple of the questions kept bringing us back to look what happened with Native but its probably worth while to remind people look what we did with Costa. And as there are things that we learned in Native that we can apply to acquisitions there are multiple of other things that we learned with Costa that we can apply to acquisitions.

The Native issue is not getting bounced out of doors, it's we haven’t in kind of a worth while we move the brand into national customers. And the long and short of it with Native is it’s a very, very good brand with a loyal customer base. Clearly need to modify change consider other strategies so that that brand can move its way into some broader retail distribution. Hopefully as we go through 2014, we’ll communicate perhaps some new ideas and strategies and how we’re executing.

But I think in terms of the question about the wisdom of acquisitions I think we have a lot going for with us with our team to be able to successfully identify and then integrate and grow authentic brands that maybe under managed and under capitalized.

Robert Meeder - UBS Financial

Okay. I’ve got one last question. I’ve kind of following you guys learn to understand this kind of gradual migration of your growth, what’s your distribution network and so forth. Is that the same plan to attack the West Coast once you get there or are you just kind of find a toehold and build the distribution network or is the West Coast in California perhaps in particular totally different animal as far as approaching it?

Dave Whalen

Well, I think we do have a toehold in California and actually our business off a very small base is growing well in California. California is the clearly the most competitive sunglass market in the country and one where we want to be, make the right moves to succeed, so. And what we know is a disciplined grassroots step by step approach that has worked across the southeast and into Texas, starting to move up into Colorado. So we’re not going to rush it into California, we’re not going to do anything differently than what we’ve done and had success with over the past 10 years, but certainly we have an eye on that state and are going to go after it.

Operator

Thank you. I'm showing no further questions. I would now like to turn the call back to Whalen for any further remarks.

Dave Whalen

Okay, well, thank you all for listening. I appreciate all the questions and the comments and the interest in our company. We look forward to talking to you about our results in February and go Red Socks. Thank you.

Operator

Thank you, ladies and gentleman. Thank you for participating in today’s conference. This concludes today’s program. You may all disconnect. Everyone have a great day.

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Source: Costa's CEO Discusses Q3 2013 Results - Earnings Call Transcript
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