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Executives

Allison Malkin - Investor Relations, Integrated Corporate Relations

Scott Beattie - Chairman, President and Chief Executive Officer

Joel Ronkin - Executive Vice President and General Manager, North America

Kathleen Widmer - Executive Vice President and Chief Marketing Officer

Marcey Becker - Senior Vice President, Finance, Treasurer and Corporate Development

Analysts

Arnie Ursaner - CJS Securities

Joe Lachky - Wells Fargo

Connie Maneaty - BMO Capital

Bill Chappell - SunTrust

David Wu - Telsey Advisory Group

Linda Bolton Weiser - B. Riley

Elizabeth Arden, Inc. (RDEN) F1Q 2014 (Qtr End 09/30/2013) Earnings Call October 30, 2013 4:30 PM ET

Operator

Greetings, and welcome to the Elizabeth Arden's first quarter 2014 earnings conference call. (Operator Instructions) It is now my pleasure to introduce your host, Allison Malkin of ICR. Thank you. Ms. Malkin, you may begin.

Allison Malkin

Thank you. Good afternoon. Thank you for joining us. Before we begin, I'd like to remind you that some of the comments made on this call as either prepared remarks or in response to your questions may contain forward-looking statements that are made pursuant to the Safe Harbor provisions of the Securities Litigation Reform Act of 1995.

Such information is subject to risks and uncertainties that could cause actual results to differ materially from the statements as described in the press release and in Elizabeth Arden's most recent Annual Report on Form 10-K filed with the SEC. If non-GAAP financial information is provided on this call, a reconciliation of the non-GAAP information to the most comparable GAAP financial measure will be available in our press release.

I would now like to turn the call over to Scott Beattie, Chairman and CEO of Elizabeth Arden. Scott, please go ahead.

Scott Beattie

Thank you, Allison, and welcome everyone to our first quarter conference call. Joining me today is Joel Ronkin, our Executive Vice President of our North American business; Kathy Widmer, who's our Executive Vice President and Chief Marketing Officer; and Marcey Becker, our Senior VP of Finance.

In terms of the agenda today, I will provide an overview of our Q1 performance and an outlook for our important holiday second quarter. And in addition, I would like to review our key corporate initiatives, which include the EA brand repositioning, the development of our European fragrance business and a detailed review of the performance of our international business.

I will then introduce Kathy Widmer, who will provide a detailed review of the EA brand repositioning, including the performance to-date of our flagship doors and key Elizabeth Arden brand initiatives for skin care, color and fragrance. Kathy will also provide a review of our fragrance brands initiatives and marketing programs through the holiday season.

Following Kathy, Joel will provide a review of our North American prestige and mass business units, including our direct-to-consumer business. And finally Marcey will provide a detailed review of our key financial metrics and our outlook and guidance for Q2 and the remainder of the fiscal year.

In terms of our Q1 performance, it was essentially in line with our expectations and the guidance that we laid out during our yearend conference call in August. The Elizabeth Arden brand performance was particularly encouraging, given the broad base of improvement across skin care, fragrance and color cosmetics, each of which were up between 11% and 12% and it was equally as broad across the geographies, including North America, Europe and Asia.

The only business unit internationally where the Elizabeth Arden brand was not double-digits was our distributor and travel retail business unit, which we expect to improve during the second quarter, it's more a matter of phasing. Although, one quarter of double-digit growth for the global Elizabeth Arden brand does not define a successfully repositioning, it is encouraging to see the broad based acceleration and growth of the brand.

As we stated in our August conference call, we have established a cross-functional global team of commercial and marketing executives that are intensely focused on driving improvement in the Elizabeth Arden brand globally. While I'm certain it will experience uneven growth in future quarters, I believe we are focused on the key drivers of growth in the key markets, and I am very optimistic that we are on the right track.

In terms of our fragrance portfolio, throughout the international markets, the business declined approximately 3.5%, again in line with what our expectations were. As planned and embedded in our guidance was a decline associated with the extraordinary pipeline of new fragrance launches in acquired brands that we had both at this quarter last year.

Europe, our key focus market was up 4%. There isn't any significant trends or takeaways associated with these numbers, particularly given the phasing that is natural in all of our businesses between the Q1 and Q2 quarters. The performance and insights on our fragrance brands and the rest of our business for that matter will come post holiday season and when we review the brand performance vis-à-vis the competition.

In terms of our key corporate initiatives, repositioning the Elizabeth Arden brand, driving additional growth in Europe and international of our fragrance portfolio, and improving our U.S. mass fragrance retail performance.

I am satisfied that we've got the appropriate corporate focus, as I promised in our Q4 conference call in August, and we've dedicated an appropriate management resources. We mobilized those resources, so that we can experience sustained improvement throughout the remainder of the year, particularly in the second half of the year as we experience weaker comp revenue and profit metrics.

The business environment continues to be very uneven quarter-to-quarter in all of our business units around the world, for both ourselves as manufacturers of brands and our retail partners. Each of us has limited confidence in the forward visibility of our business. The natural reaction is to be cautious and that is what we are experiencing throughout our business. As a result, we have widened the range of our Q2 guidance to reflect this lack of forward debt visibility.

As stated in our press release, we are thrilled to have that Eric Lauzat, join our executive team as Executive VP of our International Business. Eric's commercial experience in building global prestige beauty brands for over 25 years at L'Oreal, the global leader in beauty, is obviously a perfect fit with the opportunity here at Elizabeth Arden.

More importantly, Eric, who I've known for 15 years as a competitor and industry colleague, has developed and mentored many of our industries best beauty leaders. He has a stellar reputation of building high-performance teams that are successful. And on behalf of our entire team at Elizabeth Arden, welcome Eric.

In terms of our CFO search, it is well underway and is being managed by Lita Cunningham, our Global Head of HR and myself, in partnership with Spencer Stuart. There's an absolute clarity in the job specifications between myself, our executive team and the Elizabeth Arden Board of Directors. And we've an abundance of world-class CFO candidates and finance candidates to choose from.

Given that, we are not willing to compromise, given the importance of the role. And in addition many of the potential candidates are currently CFOs of public companies and require long notice periods to change jobs. These two factors have contributed a fact that I would not anticipate an announcement of the new CFO until the New Year.

Fortunately, our finance team is very strong and capable and is more than able to manage the finance functions, until the role is filled. In the interim both myself and Laura Clark, our Head of the Audit Committee of our Board of Directors are also providing oversight.

I would now like to turn the call over to Kathy Widmer, our Chief Marketing Officer.

Kathleen Widmer

Good afternoon. I'll begin by sharing performance across the Elizabeth Arden brand, followed by fragrance. Revenue for the first quarter was up 11% for the Elizabeth Arden brand, on strong and balanced growth across all three product segments, skin care, color and fragrance.

Overall, skin care was up 10%, driven by 23% growth in PREVAGE for the quarter as well as strong overall skin care sales in China. PREVAGE sales were up in North America and also international, where product pipeline was shipped for Phase 1 one of the PREVAGE launch in China, following regulatory approval of the line of products.

Skin care sales were broadly up in China in support of e-commerce demand and the recent establishment of Arden's prestige beauty presence in the leading China digital marketplace called Tmall. Growth in PREVAGE was slightly offset by declines versus last year in Ceramide and Eight Hour.

The Arden color segment was up 12% in sales for the quarter, driven by the launch of Beautiful Color Lipstick and Lip Liner group of products. This launch rounds up the reformulated offerings in our color segment, since we initiated product repositioning a year ago.

And Arden fragrance was up 12% for the quarter, driven by the launch of our new global pillar fragrance called UNTOLD, offset slightly by declines in Red Door and various legacy Arden fragrances. UNTOLD has received exceptional support by the global beauty press and is delivering shipment and retail performance consistent with our aggressive expectations of a strong long-term fragrance pillar.

Our global flagship stores continue to perform well and are up 15% reset to date compared to prior year. Momentum slowed during the quarter as a result of industry-wide extreme softness in Korea travel retail and beauty markets. Subtracting the impact of Korea, retail sales across the flagships are up 21%.

We're now approaching a full year flagship to our performance tracking and we expect some moderation in the year-on-year sales increases, as we crossover the one-year anniversary in second quarter. We will continue to monitor performance across these doors throughout this fiscal year.

We have largely completed the renovation stage of our Arden repositioning initiative, in which products, packaging, in-store collateral, our website, counter appearance and assortment have been streamlined, modernized and restored to a quality level we're quite pleased with. There will continue to be a multiyear transition of beauty calendars to the new design, as we prioritize and allocate capital to key geographies and key doors.

Our focus now turns to ongoing and consistent initiatives to drive counter productivity in the highest potential doors, emphasis on driving demand closed to the point of sale and ways to increase relevance of the brand among target consumers.

On the topic of increasing relevance, I'd like to provide an update on the opening of our Union Square, New York beauty salon and shop called the Red Door. The Red Door is designed to provide contemporary express services for urban working women as well as hands-on opportunities to learn about and purchase custom skin care regimen.

Technology exist in the Red Door to assess the skins current condition, predict and illustrate the skins future condition and to customize a skin care regimen appropriate to each individual women. Likewise, we will launch with emphasis on free trial of our custom color technology, which provides a perfect match foundation, mixed on site, as it means to driving long-term loyalty and repeat purchase in the highly engaged foundation segment.

Opening of the Red Door is planned for mid November. As we gain more experience in collaboration with our Red Door Spa partners in the execution of this initiative, we expect to integrate our successes into other spa locations as well as important flagship counter locations around the world.

Moving on to fragrance. Excluding Arden fragrance, our overall fragrance portfolio was down 5% for the quarter. This performance was largely expected in both North America and international, given the extraordinarily large influx of pipeline associated with key acquisitions last year as well as significant one-time distribution expansion of several brands, including Taylor Swift, Justin Bieber, Ed Hardy and Nicki Minaj. Our go-to-market business model for these brands is now transitioning from launch year high investment awareness driving activity to more a long-term sustaining programs with higher return on investment throughout the lifecycle of the brand.

I'd like to share a few fragrance growth initiatives, which are underway in North America and international. For the first time this holiday we will execute a combined celebrity fragrance consumer promotion that leverages the breadth of our celebrity-licensed fragrances in the important holiday gift-giving period.

The program is called Ring in the Holiday and integrates a digital platform, retail, e-commerce and in-store activation to provide additional value to consumers at holiday via a personal message from their favorite celebrity. The program will be executed in North America as well as several key international markets. We are also engaged in an initiative to improve return on invested dollars via our promotional spent with retailers as well as through brand building initiative such as advertising.

We are initially focused on the U.K. involving a buy program, by retailer, [ph] Deep Dive that we believe will produce stronger return for our spend as well as enhanced profitability in the market. And we continue to build on our small, but successful initial entry into the Brazil fragrance market via our partnership with a direct sales organization within the prestige fragrance segment in Brazil.

We believe our existing fragrance portfolio is a strong match for consumer fragrance preferences in the market, and will build on a successful introduction of Britney Fantasy last year, by broadening our brand offerings and extending our reach into the market. This concludes the marketing update.

And I'll now turn over to Joel.

Joel Ronkin

Thank you, Kathy. I'm going to discuss the performance of our North America business, including first, an overview of our sales performance in the prestige channel as well as some of the initiatives we have in place for the holiday season in that channel. I will also then do the same for the mass channel.

The North American business comprises about two-thirds of total company net sales, and includes all sales of our products in the prestige and mass channels in North America as well as our company-owned outlet stores and our global e-commerce business.

First, on an overall basis, our net sales in the first quarter for North America were down 3% compared to last year, reflecting growth in sales of Arden branded products in the prestige channel, somewhat offset by an expected decline in fragrance sales to department stores and mass customers.

Now focusing first on the prestige channel, net sales in the first quarter were up 5%, primarily as a result of 15% growth in the Arden counter business, as well as 90% growth in the direct-to-consumer business, including strong growth in e-commerce as well as outlet stores.

This growth was partially offset by a slight decline in fragrance sales in the prestige channel, as a result of unusually high launch volume during the same quarter last year as compared to this year. That being said, we did benefit from the strong launch of the One Direction fragrance brand, Our Moment, this quarter, which we distribute on the half of another manufacture. This brand has been tremendously successful with a number one launch rank for September and overall ranking of four of all ladies brands in the prestige channel for the month of September.

Now as we move forward, we have a number of important initiatives to drive stronger sales growth in the prestige channel. As Scott and Kathy both discussed, the Arden's repositioning continues to be a key focus and we are completing a number of counter renovations in Canada and the U.S. this fall, including our largest counter Macy's Herald square, which is just being completed now.

Improvements in fixturing and visual elements are also underway at many doors. Over the next few heavy traffic months, we'll be conducting intensification program with increased staffing, commission program and enhanced sampling activities during peak holiday shopping hours.

We are pleased with the continued support of this important initiative by our retail partners. And in fact, just this past month, we learned that Elizabeth Arden Canada was awarded vendor of the year prestige by Shoppers Drug Mart, the highest award, and in getting that award they noted our partnership and supporting continuing to rollout the Elizabeth Arden for Men. Finally, we also continue to work closely with the Red Door Spa management to transform the 30 Red Door Spas into high-performing retail locations to further drive growth of the Elizabeth Arden brand.

Now, turning to the mass channel. Net deals declined 7% for the first quarter, which was anticipated in our guidance. Category retail sales in mass were down mid-single digits for the first quarter and our retail sales were consistent with this trend, resulting in generally flat market share.

Retail sales and replenishment trends vary considerably among our counts, but we did see an overall improvement in these trends in the month of September and October. Across our entire mass fragrance business, our holiday sales and marketing programs are just beginning.

Our activities include an array of innovative digital and social media marketing programs and promotions, supported by retailer specific trade advertising. While the support we have received from our retailers with respect to these programs have been very strong, the volatility we have seen in retail sales as well as replenishment trends, in mass this past year, is creating some uncertainty for the holiday season.

Finally, I want to make one last comment regarding this year's holiday season calendar. Most of you are aware that there is one less week between Thanksgiving and Christmas as compared to last year, while retailers are a bit uneasy about the impact of a calendar change on sales, the general consensus seems to be that shopping will be compressed, but total sales should be unaffected by the calendar. And with that I'd now like to turn the call over to Marcey Becker, our Senior Vice President of Finance.

Marcey Becker

Thank you, Joel. I will discuss our first quarter working capital cash flow and balance sheet metrics and non-recurring items. I will also provide comments regarding our outlook for the second quarter and fiscal 2014. Our net sales decreased slightly at GAAP rates and increased by 0.6% at constant FX rates.

Gross margins, after adjusting for Elizabeth Arden repositioning and acquisition-related costs incurred in the prior year were lower due to the anniversarying of a significant number of launches in the first half of last year, which included a pipeline of basic products at higher margins. Gross margins this year were also impacted by a higher percentage of lower gross margin distributed brand, namely the One Direction fragrance, which we introduced in North America this quarter, as Joel mentioned.

Recurring SG&A expenses were slightly lower as compared to last year. The prior year include higher marketing and advertising expenses to support this significant launch activity. The current quarter was also impacted by the timing of advertising spend and benefited from the sales force restructuring of our U.S. Department Store of Fragrance Sales Organization.

As a percentage of net sales recurring total indirect SG&A expenses were essentially flat as compared to the prior at 17%. The increase in depreciation and amortization reflects the incremental depreciation expense for IT and capital investment for the Elizabeth Arden brand repositioning. The adjusted tax rate was 22.5% and we still anticipate the adjusted tax rate for fiscal 2014 to be in the 24% to 25% range.

Turning to the balance sheet and cash flow metrics. Cash flow used in operations was a $130.7 million as compared to a use of $141.3 million in the prior year period. We ended the quarter with inventory of $402 million to slightly higher than the inventory balance of $396 million as of September 30, 2012. We still expect inventory at the end of this fiscal to approximate inventory levels as of the end of the fiscal 2013. Accounts receivable increased 9% as compared to the end of the first quarter of last year and DSOs increased by three days.

During the quarter, capital expenditures totaled $13.9 million, which include investments in the EA brand including the new 5th Avenue Red Door Spa prototype in Union Square in New York that Kathy mentioned and for IT. Capital expenditures expected for this year also include implementation of the final phase of the Oracle Enterprises System, which is expected to be result in a capital outlay for the year of approximately $10 million for that project.

Short term debt, net of cash was a $189 million at quarter end, slightly higher than the net debt position at September 30, 2012 of $178 million. The increase is due to share repurchases and the other investments, as Jeff mentioned.

During the quarter, we repurchased a 126,000 shares for $5 million, bringing the total shares repurchased under our share buyback program to 4.5 million share for $85 million and have $35 million remaining under the current program. Our priorities for cash for working capital, investment behind the EA brand repositioning, acquisitions and share repurchases.

Regarding the non-recurring expenses, as I've mentioned previously we expect to incur $11 million to $15 million of expenses related to the EA brand repositioning of which $4.2 million was incurred in the first quarter. Additionally, we expect to incur restructuring and related transition cost of approximately $5 million this fiscal year, primarily related to eliminating sales and indirect overhead positions of which $2.4 million was incurred in Q1.

Finally, turning to our sales and earnings guidance for Q2, our forward guidance reflects the variability of retail sales during the holiday period in basic stock replenishment orders. As such we are prudently providing a wide range.

For the second quarter, net sales are expected to range between $450 million to $475 million and earnings per share to range between $1.30 to $1.60. We are anniversarying a significant number of launches in the first half that were incurred in the first half of last year. Recall, we delivered sales growth of 13.5% and 9% for the first and second quarters last year, respectively 11% for the first half.

Last year's sales include a pipeline of basic product at higher margins than the current year's mix of product. As such, we are projecting gross margins to be flat to slightly down for the first half of this fiscal year, and as we mentioned on our last call, we expect to see improvement in gross margins beginning in the second half of this fiscal year.

Given our expectations for the second quarter, for the full fiscal year, we expect to achieve the low-end to midpoint of our annual guidance ranges for net sales and EPS, unless we a sustained improvement in retail sales trends in our U.S. mass business.

With that, I will turn it back to Scott.

Scott Beattie

Thank you, Marcey. And operator, we will open it up for questions now.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Arnie Ursaner with CJS Securities.

Arnie Ursaner - CJS Securities

Two quick questions from Marcey. Marcey you had previously talked about a currency headwind of $0.20, is that still embedded in your guidance?

Marcey Becker

It's reduced, Arnie, to about $0.11 for the full year.

Arnie Ursaner - CJS Securities

And you also have a new line item in your financials, a net loss attributable to a non-controlled interest, is that the Red Door?

Marcey Becker

No. That is related to another investment that we made, where we are a majority owner, and that represents the minority interest.

Arnie Ursaner - CJS Securities

And can you comment somewhat also on the team and the number of doors that have been repositioned? And how many we expect in the upcoming year?

Kathleen Widmer

When we report out on the flagship doors, we're reporting out on 41 doors. So the 15% increase that are reported was on those doors. We also have a second set of doors, which we call intensification doors, which are a 132 additional doors. And those doors for the quarter were up 10%. And we expect to expand beyond those doors in the second half of this year. But the number of doors we're expanding to is yet to be determined.

Arnie Ursaner - CJS Securities

My final question relates. You had an issue in U.K. in the June quarter. Can you update us on the status of that?

Scott Beattie

A couple of things. One, the overall operating plan for the U.K. market has been reviewed, I would say, intensely by a number of our senior executives to ensure that we're investing in the right promotional plan as well as with the right customers by brand. And I am confident that the over side in that business will generate a lot more predictable performance this year. In addition to that, which is positive; the U.K. economy starting to improve and performance of the overall categories improving there. So that will be a positive as well.

Operator

Our next question comes from Joe Lachky with Wells Fargo.

Joe Lachky - Wells Fargo

I'm curious, I guess it's understandable why you're keeping the wide range of EPS for the second quarter. But your fiscal year guidance range is I guess narrowed to about $0.08. So does that imply maybe if you have some variability in the second quarter, you have flexibility to be able to make it up in the back half of the year?

Scott Beattie

Yes. Not only because of the performance of the business last year, but also we have a number of initiatives that we have in place that will contribute to the second half performance.

Joe Lachky - Wells Fargo

And maybe if you can just review some of those, because it looks like you're expecting revenue to be up and obviously gross margin improvement in the second half. If you could kind of review the factor behind those assumptions?

Scott Beattie

Well, some of them are just a continuation of the initiatives we have against the Elizabeth Arden brand. Kathy mentioned one for example. We've been able to have certain of our brand, specifically PREVAGE registered in China, and that's now being launched and we expect that to be a net contribute to the China business. Our greater China business has pretty good momentum both, it's traditional bricks and mortar distribution business, but also the e-commerce platform there is performing well.

We also, and Marcey sort of alluded to, we made an acquisition on the skin care business that will open up some additional distribution of the Elizabeth Arden skin care brand, both domestically and globally. And I'd rather not get into all the details of that because there is some competitive sensitivity to it, but I think it will be a contributor to skin care growth and margin growth and earnings growth in the second half.

Joe Lachky - Wells Fargo

And then just one final one, so it sounds like the replenishment issues, are you past those in the mass channel or are now at basically one-to-one, sell-in, sell-through dynamics? And then have you noticed any reduction in floor space or pullback in general from mass retailers?

Scott Beattie

I'll let Joel, elaborate on for a second, but I think in his remark he was pretty clear that we're continuing to see pretty uneven retail sell-through and replenishment. Some much more positive, some negative, and at this time of the year, we don't have the same kind of forward visibility and confidence and that's why we have opened the range up a little bit in terms of guidance for the second quarter. Joel, you want to comment on any of the other?

Joel Ronkin

As far as space in location and in stores with commitment to the category, we see no evidence whatsoever of any pullback on that, the mass channel.

Operator

Our next question comes from Connie Maneaty with BMO Capital.

Connie Maneaty - BMO Capital

So what was the growth of Elizabeth Arden sales excluding the flagship store and the intensification doors?

Joel Ronkin

It's essentially the same, Connie. So as we said in other calls that flagship doors really don't have a material impact. There is only 41 of those doors globally and doesn't have a material impact in the overall performance of the brand. So as you recall, last year even though we had 20% plus performance growth on the flagship doors, we had negligible growth in the Arden brand, and it was essentially for the same reason. It really doesn't have a material impact on the business.

But I think it's encouraging to see, as I said in my statement, pretty broad-base growth across skin care, color, and fragrance and very broad base growth geographically on the brand. And one quarter does not make a successful repositioning, but it's a good step forward. And again, as I said we are very focused, both the commercial teams and the marketing team at driving overall brand growth globally for those Elizabeth Arden.

Connie Maneaty - BMO Capital

How much were Elizabeth Arden sales in China?

Joel Ronkin

Well, the Greater China area was up about 70%. Greater China, include Hong Kong, Taiwan and China.

Connie Maneaty - BMO Capital

Of that 290 basis points decline in the gross margin ex-items, how much of that was due to the new distribution of one dimension and if that didn't have a major impact, what else did, because last year's gross margin expansion was so minor?

Joel Ronkin

While, the key reason was we pipelined new innovation in fragrance. We pipelined just basic stock inventory that is we don't pipeline in a tremendous amount of promotional materials and gift sets and so on, and you do it in a very efficient way, in a relatively short period of time. So the margin accretion, if you will from having a very efficient distribution of high margin basic stock products, and again an extraordinary number of those launches last year where really the primary reason for the gross margin increase last year will be different year-over-year.

Connie Maneaty - BMO Capital

So I guess I understand last year, I don't understand the decline this year?

Joel Ronkin

Well, we didn't have any of that pipeline this year and what we did pipelined to your point is the One Direction brand, which was lower margin because we actively distributed for that brand.

Connie Maneaty - BMO Capital

And just one last question. The decline in Korea, and I'm not quite sure, as if it was Korea, plus travel retail or just Korea?

Scott Beattie

Just Korea, that's geographical market of Korea, because we only 41 flagship doors that two or three that were represented in Korea are actually very high volume doors and very important and the overall industry has experienced that slowdown. The L'Oreal announced today in their numbers a slowdown in that business and we're seeing across all the brands, so just happens to be that that does have a material impact on the flagships.

Operator

Our next question comes from Bill Chappell with SunTrust.

Bill Chappell - SunTrust

I wanted to just clarify a couple of the other questions. So on that de-stock issue, you're not seeing anything new from any new retailers that's kind of behind us, you're just not behind us, you're just not seeing the full restock as we go into the holidays, is that right?

Scott Beattie

Well, we would normally not see that Bill until this quarter. Most of that restock of fragrance inventory in the planograms, it starts in the second quarter anyway. And I think as Joe mentioned in his remarks is that the retail trends and the replenishment trends are essentially as we expected.

Bill Chappell - SunTrust

But nothing since we last talked to, couple months ago. No new retailers changed their kind of outlook because we've heard some of the things from L'Oreal and Coty and others, but it sounds like you're pretty statuesque?

Scott Beattie

Now, it continues to be quite weak. And that's again, we've got strong programs and the retailers are committed to the strong programs for the fall season. And we do see pockets of strength in mass as well, but it's not consistent. And so we're just trying to be conservative here in terms of what we expect.

Bill Chappell - SunTrust

And then so if I'm looking at the currency impact, I mean net you get a $0.09 benefit from what's your original, it's like three months ago. Is the offset that just increased uncertainty in the mass channel going into the holidays and that's kind of a category-related?

Scott Beattie

I think, not just in mass business, but I think in the global business. I mean you see it across all categories in retail and across most retailers globally, there's sort of a restlessness that's occurring now. Now, hopefully with some of the extraneous issues that have affected the consumer confidence and the economy is hopefully down. These are temporarily resolved, it will provide a little bit more consistency in retail trends, but October was generally weaker for most of our retailers.

Bill Chappell - SunTrust

And then just last one for me, I didn't catch the actual share repurchase in the quarter, but I mean as you look at the free cash flow, the majority of free cash flow coming in over the next four months, I mean how do you look at that with where the stock is and would you step up and how should we look at that?

Scot Beattie

Well, I think Marcey was pretty clear and we've been pretty consistent with that is that priorities for cash or our working capital and investing in the Elizabeth Arden repositioning project and we've got a capital expenditures this year associated with our IT program and so on. And our policy towards share repurchases has always been more opportunistic than systematic. So I think we're pretty clear on our policy there.

Bill Chappell - SunTrust

So mid-30s would not be opportunistic?

Scot Beattie

I wouldn't comment on that.

Operator

Our next question comes from Joseph Altobello from Oppenheimer.

Unidentified Analyst

This is [ph] Christina on for Joe. I just wanted to follow-up on the U.K. business and I was just wondering what the sales growth was this quarter or decline?

Scott Beattie

It was actually up 18% in the U.K. and pretty significant improvement in profitability year-over-year.

Unidentified Analyst

So in the region, EMEA region, where was the decline related to?

Scott Beattie

Excuse me, what you said?

Unidentified Analyst

For fragrance, where was, what was the decline related to in that segment?

Scott Beattie

Well, we were talking about the overall U.K. market, which includes both fragrance and the Elizabeth Arden business was up 18%. So it's a combination of both businesses in the U.K. I think we've outlined that the performance of our fragrance and the EA brand in our remarks. So I don't think I have anything else to add to that.

Operator

Our next question comes from David Wu with Telsey Advisory Group.

David Wu - Telsey Advisory Group

First, can you talk about the flat market share performance that you saw in U.S. mass, and so I was wondering if there was of lack of a major product launch this quarter or were you seeing competitors perhaps becoming more promotional?

Joel Ronkin

First, of all as far as market share, every quarter we seem to be increasing our market share. When you get to the kind of market share that we have, it becomes sort of a category in some ways, particularly in prestige fragrance, so I wouldn't read anything into that. And what was the second part of your question?

David Wu - Telsey Advisory Group

If you're seeing competitors become or promotional or not?

Joel Ronkin

Not particularly. You're talking particularly in the U.S. mass? I wouldn't say it's that different. I think what we're seeing is that it's uneven between retailers. And one thing I want to correct as I said in my prepared remarks is that it was very uneven and differed by retailers, but we did see overall improvement in the month September and October in retail, EMEA sales and replenishment trends from what we have been seeing and discussing previously on prior calls.

David Wu - Telsey Advisory Group

On the EA brand, encouraged that we saw that acceleration this quarter, but I want to know how much of it was driven by like door performance versus new distribution? And given that you're now starting to anniversary some of the initial global counter redesigns from last fall, can you perhaps talk about how those initial counters are currently performing?

Marcey Becker

So there is all of the growth is comparable to last year. There is no growth associated with increased distribution for the Elizabeth Arden brand for the quarter. We are starting to anniversary already the initial launch of the flagship doors and frankly in North America and the U.S. particularly we had initiated some of those doors in the first quarter of last year.

So we were frankly pleased to see the U.S. up 20% in the flagship doors for the quarter this year. We had expected a bit more moderating trend, but I think it is prudent to expect that the trend in growth across the flagship door should moderate a bit as we cross over the anniversary of such a significant change in all of those doors.

Scott Beattie

The important thing here is that we need to emphasize because there is a number of questions, and we've had question in previous calls, the flagship doors really aren't meaningful in the overall context of the Elizabeth Arden global repositioning growth. What they provide to us is key high profile doors around the world, and which to use as a benchmark for growth and to drive initiative, so that we improve our learnings of what works and what doesn't and we can then apply that across the rest of our business.

We will continue to reported on these flagships through the end of the fiscal year, but I think what we're really focused is driving the overall brands growth. And as Kathy said, much of that repositioning comp in terms of the inventory replacement and marketing and in-store execution is behind us and now we'd like to have sustained growth of the overall brand and then that will really define both for shareholders and for us the success of the reposition.

David Wu - Telsey Advisory Group

On the European fragrance business, can you perhaps give us a progress update on new distribution growth and how you're performing in the new doors? I believe you have launched Bieber at Sephora France earlier this year, and perhaps maybe give us an update on how that's doing?

Scott Beattie

I don't know specifically how that's doing at Sephora. It's a relatively modest initiative, but I can tell you that the retail performance across all of our key retailers in Europe as well as our business with them is performing well. So still a little less than what our objectives are just because of that the base stay relatively modest levels, that market share that we have there. But I think all of the initiatives that we have in place, the way we're tracking those initiative and the way we're extending best practices into any of the markets are all working and it can be best measured as I said in my remarks through the Christmas season.

The challenge you have in the first quarter is there is a lot of phasing between the first and second quarter in terms of where we spend fewer money in advertising and promotional programs as well as when we shift various parts of the programs, sometimes gift sets get shift into late September as opposed to early October depending on that retail counter.

So it's not a lot to read into the phasing between the first and second quarter. And in fact we managed the business as the first half versus the second half of our business. And we'd look at the first and second quarter performance of our brands and financial performance really as a unit. So that's how we manage it internally and that's how is how I would suggest people look at it.

Operator

Our next question comes from Linda Bolton Weiser with B. Riley.

Linda Bolton Weiser - B. Riley

I was wondering, on the fragrance business, I know you talked about some things or initiatives that would improve growth in the second half of the year, but your comparison in the prior year really doesn't get a lot easier until the fourth quarter. You really had double-digit growth through the first three quarters of last year. And the comp in the third quarter, I think it's something like up 18% in the prior year. So do you expect fragrance to have positive growth sometime before the fourth quarter or is it just going to be kind of declines up until that comparison gets easier in the fourth quarter?

Scott Beattie

Frankly, I haven't looked at it in that level of detail. We've incorporated that into our guidance and I think we're comfortable with that guidance, so I'm just frankly not in a position to say whether disproportional amount of fragrance growth is third versus fourth quarter. There is a number of initiatives though from a commercial point of view that take place during the second half. And again, the third quarter is a relatively modest quarter for us. So it could move around at relative de minimus amounts of revenue. And Joel, you want to comment?

Joel Ronkin

Well, keep in mind also that depending on what happens to replenishment with some of our key accounts that could shift timing from Q2 into Q3 and actually show more growth. And then we've said that we're uneasy based on past history of what the replenishment trends are at, replenishment orders are going to be, that can also drive it as well.

Linda Bolton Weiser - B. Riley

And then kind of related to that, I think I'm remembering when you reported the June quarter that you had said that even though there was a problem with shipping into a big retail customer in the mass channel, that the POS performance actually was kind of a little bit better. I guess we took heart in that.

Scott Beattie

Joel confirmed that too in his remarks, when he just mentioned that those trends have improved since we reported in August.

Joel Ronkin

What I said was for September and October the retail trends were better. If you're referring to the fourth quarter of last fiscal year, we said we were not surprised by the retail trends in particular at a couple of accounts where we have replenishment issues.

Linda Bolton Weiser - B. Riley

So I guess I'm not understanding, because you're saying that in this quarter the retail sell-through, if I understood you correctly, in the mass channel was down mid-single digits. So I realize that's a bunch of different retailers. But you're saying at that one particular retailer, things are better than the overall mass channel, which you said is down mid-single digit?

Scott Bettie

We are not commenting on any one particular account. What we are saying is overall for the month of September and October retail trends got better than what they had been running in the prior few months.

Linda Bolton Weiser - B. Riley

At that one particular retailer you mean?

Scott Bettie

No. I am not saying about one particular retailer. I'm saying overall mass.

Linda Bolton Weiser - B. Riley

I guess I am confused, I thought you said the retail was down mid-single digit, the POS, is that not right?

Scott Bettie

I did. That's a category retail sales. That's the entire category for all mass, were down mid-single digit for the first quarter. And then our retail sales overall were consistent with that trend.

Linda Bolton Weiser - B. Riley

And the mid-single digit has improved versus what it was a few months prior?

Scott Bettie

That is correct.

Linda Bolton Weiser - B. Riley

And then on the Elizabeth Arden brand side, the 12% growth was certainly impressive, but again I'm wondering how that matches up with POS performance, whether your POS actually accelerated quite a bit versus what it was last quarter or did you actually replenish the channel more, whereas there wasn't as much replenishment or shipment in last quarter? So how does that shipment of 12% compare to the POS for the brand?

Scott Bettie

The difficulty in that is that, first of all, we don't have retail sell-through POS information in the vast majority of our international business. We also use distributors in many of the markets around the world, and sell into centralized travel retail customers that then redistribute. So it's not just us, it's our whole industry, because of the thousands of doors and all of the geographies around the world, limited access or in consistent access to retail sell-through trends, other than overall industry trends.

I would say that generally the performance of the Arden brand would be pretty closed to consistent with the retail performance of the business, maybe with the exception of the UNTOLD pipeline that we had in fragrance. But skin care and color, they don't tend to deviate in replenishment tremendously from what the retail sell-throughs are. So that is close to sort of comfort I guess I think we can give to you on that.

Linda Bolton Weiser - B. Riley

Just finally, on the cash flows. Your free cash flow after CapEx was actually kind of nominally positive in FY '13, and if you come in at the low-end of your earnings range for FY '14 I mean that you're not going to be generating that much free cash. So I guess I'm a little surprised at share repurchase, because I would think you would want to be given the investment that you need to make that you would not be doing share repurchase. But can you tell me also the CapEx guidance, I missed it for the year, for FY '14, including that project you mentioned, what would be the CapEx for the year?

Marcey Becker

Between $45 million to $50 million and in that is the $10 million for that IT project.

Operator

There are no further questions at this time. I would like to turn the floor back over to management for closing comments.

Scott Beattie

Thank you very much everyone for joining us today.

Operator

This concludes today's teleconference. You may disconnect your lines at this time. And thank you for your participation.

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