Joe's Jeans Inc. F1Q10 (Qtr End 02/28/10) Earnings Call Transcript

Apr. 8.10 | About: Joe's Jeans (JOEZ)

Joe's Jeans Inc. (NASDAQ:JOEZ)

F1Q10 (Qtr End 02/28/10) Earnings Call Transcript

April 8, 2010 4:30 pm ET

Executives

Lori Nembirkow – General Counsel

Marc Crossman – President and CEO

Hamish Sandhu – CFO

Analysts

Liz Pierce – Roth Capital Partners

Ronald Bookbinder – Global Hunter

Jim Watkins [ph] – DFW Mentor [ph]

Buzz Zaino – Royce & Associates, Inc.

Stephen Chang [ph] – Rutger Capital [ph]

Brandon Austin [ph] – Benator [ph]

Max Lerner [ph] – Max Lerner Inc. [ph]

Michael Anthony

Operator

Good day, ladies and gentlemen, and welcome to the first quarter 2010 Joe's Jeans Incorporated earnings conference call. My name is Sally, and I will be your operator for today. (Operator instructions) I would now like to turn the conference over to your host for today, Lori Nembirkow with General Counsel. Please proceed.

Lori Nembirkow

Thanks, operator, and thanks to everyone for joining the call. Present on our call today to discuss our results are Marc Crossman, our President and CEO, and Hamish Sandhu, our CFO.

Before we start let me review the company’s safe harbor language. Today’s call may contain forward-looking statements which are statements of the company’s or management’s intentions, hopes, beliefs, expectations or predictions of the future. These statements are subject to risks and uncertainties that could cause our actual results to be materially different. You are cautioned not to place undue reliance on forward-looking statements which speak only as of the date they are made.

I also refer you to our reports that are filed with the SEC, which includes our first quarter 2010 report on Form 10-Q to be filed today. This report includes information that could also cause our actual results to be materially different from those contained in any projections, which may be made during this conference call. By making any forward-looking statements the company undertakes no obligation to update them for revisions or changes after today.

Finally, a copy of our earnings release and a recording of this call will be available on our website www.joesjeans.com and a telephone replay will be available for one week from today.

Now I’ll turn the call over to Marc.

Marc Crossman

Thanks, Lori, and thanks everyone for joining us today. I’ll first speak about the first quarter results and then I’ll turn the call over to Hamish for a discussion of our financials. Finally, we will end with a Q&A session.

For the first quarter our net sales increased 41% to $23.2 million and our operating income increased 38% to $1.4 million. We were pleased with these results as we were able to build upon the sales momentum we experienced in the fourth quarter. We did turn not only the strong denim sales, but also with the introduction of new product classification. In fact, during the quarter 19% of our sales came from non-denim product category.

As we alluded to on the last conference call, we launched another two product categories knit tops, and non-denim bottoms, which I will describe in more detail in a moment.

We said our operating income increased 38%. It is important to note that this quarter's operating income includes $700,000 increase in marketing and advertising costs. With our legging marketing campaign ending, we won't see these costs in future quarters. Excluding the increase in marketing and advertising, our operating income would have increased 107%.

For the spring 2010, we launched two new classifications, The T and The Pant by Joe's. The T is a line of knit tops in a variety of shapes and silhouettes with novelty treatments like vintage, cloud and crimple [ph] washes and water color dyes. In addition we have added special details like raw edges, vintage grinding and (inaudible). Our retail price points range from $68 to $128. The initial feedback from retailers has been our line of knit tops stands out from the rest of the market. Accordingly, virtually all of our major accounts are testing The T this spring.

The second new product classification we launched is The Pant by Joe's. About a year ago, as we were looking to expand our product scope, it was evident to us that our customer was looking for other alternatives besides just premium denim. There wasn’t a contemporary offering in the casual non-denim marketplace. Accordingly, we have created an expensive line of pants, shorts, and crops. We worked with the finest European Twill, linen, and candid [ph] fabrics and leveraged our expertise in garments wash and fit.

Spring lines on trend and will (inaudible) retail price points ranging from $88 to $148. Our retailers have embraced The Pant and are committed to building this additional layer of premium bottoms into their current business mix.

Moving on to our sales by distribution channel, for the first quarter all of our distribution channel; namely domestic women’s, men’s, international and retail experienced healthy sales increases.

Our women's department store sales increased 37% for the first quarter. As we have said in the past this is our most mature and fully penetrated distribution channel as evidenced by the fact that they are found in all better department stores across the country. The significant revenue gain in the channel was driven by maximizing our existing denim business and selling of new product categories. We are clearly increasing our average on hand inventory in a time when other brands and businesses are being scaled back.

We are pleased with the layers of growth these new classifications are providing and the expansion of the brand within these stores. Our women’s specialty stores net sales increased 32% for the first quarter, which is pleasing considering this has been a difficult distribution channel for us over the past year. Sales gains are coming not only from our new product classifications but importantly off denim also.

Our domestic men’s business was up 63% for the first quarter. The vast majority of the growth in the men's business came from denim. New categories also added to the growth but not to the extent that it did on the women's side.

Our men’s department store sales increased by 83% on a year-over-year basis. Our men’s business has been anchored by a very strong core basic program with our department store partners.

Our men’s specialty store sales increased by a very healthy 43%. Despite a challenging specialty store segment we are seeing growth. We are building a stronger denim business and taking market share.

Our international sales were up 35% during the quarter. Sales were up across all our major countries namely France, Canada and Japan. The sales increases again were largely driven by the introduction of our new product classifications. In addition, growth in France is bolstered by the opening of a 16 Shop and Shops in Galley Lafayette and Petron.

Our retail business generated revenues of $1.8 million, 94% increase from the prior year’s period. More importantly our same-store sales were up 32% versus the prior year period and our gross margin for the quarter was 52%. As we have recently announced, we are aggressively pursuing the roll out of outlet stores with Simon Property Group. We recently announced signing leases for nine new outlets to be opened during 2010. We opened the first of the nine new outlets in Cabazon just weeks ago, and anticipate opening a second next week. We are going to open another five in (inaudible) with the remaining opening in the second half of the year.

Based on our current store base and planned openings, we will have a minimum of 16 stores by year-end. On the full price side of the equation, we are opening a store in Santa Monica at the end of August. However, we are currently evaluating additional full-time (inaudible) and would expect to have more announcements in openings in the future.

I’ll now turn the call over to Hamish to discuss our financial results.

Hamish Sandhu

Thanks, Marc. During the quarter net sales increased to $23.2 million from $16.5 million over the prior year period as Marc just discussed. Our gross profit increased to $11.4 million from $8.3 million in the prior year period. At 49%, our gross margin decreased one percentage point versus the year ago quarter. The increase in gross profit was due to our increase in net sales. Our gross margin decreased as a result of the addition of lower margin new product lines, as we continue to evaluate our sourcing options for these classifications.

First quarter SG&A was $9.7 million compared to $7.1 million a year ago. The increase over last year is mostly attributable to additional head count and rent costs associated with our retail stores and increases in our facilities and distribution expenses associated with our move and our increase in sales volumes.

Our advertising expenses also increased as we launched new advertising initiatives to support our new expansion into other product lines, and sample expense increased as a result of our investment into the new product classification.

Depreciation and amortization expense increased by $78,000 to $213,000 in the first quarter of 2010 from $135,000 in the prior year. This increase was due to the additional depreciation expense associated with leasehold improvements for our two additional retail stores in 2009, and accelerated depreciation of leasehold improvements as a result of the relocation of our offices.

Operating income increased 36% to $1.12 million from $1 million in the prior year. Our effective tax rate for the quarter was 48% compared to 15% for the first quarter of fiscal 2009. The lower effective tax rate in the first quarter of 2009 was due to the valuation allowance recorded against our deferred tax assets. The original valuation allowance was recorded against our deferred tax assets to account for the difference between book basis and tax basis of certain items such as the benefit of net operating loss carried forwards, various allowances, and stock compensation expense.

In the fourth quarter of 2009, we reversed and recognized a tax benefit of 20.3 million valuation for our deferred tax assets, because we believe in the future years that we will fully utilize it. We had been generating increasing taxable income for the past three years, and believe we will continue to generate taxable income in the future.

As a result, our tax expenses no longer partially offset by the valuation allowance and our effective tax rate has increased. This resulted in income tax expense of 634,000 in the first quarter of fiscal 2010 compared to 140,000 in the first quarter of fiscal 2009. In summary, these results led to net income of $694,000 compared to $800,000 during the prior year period. We earned $0.01 per share in both periods.

Now I’ll turn the call back to Marc.

Marc Crossman

Thanks, Hamish. Before we turn the call back to the operator for questions, I want to make a few closing remarks. As said on our last call, our strategy for 2010 is to accelerate our retail store openings, continue to add new licenses, and launch additional product classifications. With the addition of another store, the addition of a shoe licensee, and the initial shipment to two new product classifications, we are pleased to report that we made significant progress on all three objectives since our last conference call.

Operator, we’re now ready to take questions.

Question-and-Answer Session

Operator

(Operator instructions) Our first question comes from the line of Liz Pierce with Roth Capital Partners. Please proceed.

Liz Pierce – Roth Capital Partners

Can you guys hear me?

Marc Crossman

We can hear you.

Liz Pierce – Roth Capital Partners

Can you hear me?

Marc Crossman

Yes.

Liz Pierce – Roth Capital Partners

I am not sure you can.

Operator

Your line is open, Ms. Pierce.

Liz Pierce – Roth Capital Partners

Okay, sorry. There is a lot of echoing noise. Congratulations, nice job. My first question is, when you are thinking about modeling on the retail side going forward. So if I heard you correctly, you said comps were up I think in the 37% range. Maybe give some guidance on what you – how you think we should be modeling comps going forward?

Marc Crossman

You know, we have seen it has been pretty consistent in that high 30s to high 40s range for some time now. So we're kind of looking out at the business. Going forward I think that is a good comp to use for our business. Right now we are actually trending higher than that thus far in April and certainly in March we were higher than that.

Liz Pierce – Roth Capital Partners

Okay, and Marc are the stores if we just break it down between outlets and the full price, I think you guys had talked about outlets doing around 1.2 million and full price 1.5 million, are the stores tracking to that level of productivity. I would think they will be maybe higher with those kinds of comps.

Marc Crossman

Well, the productivity has actually slipped around and the productivity is higher on the outlet side than it is on the full price side. I just flipped those numbers around in order to get to the right number.

Liz Pierce – Roth Capital Partners

Okay. So, 1.5 for outlets and 1.2 for full price.

Marc Crossman

Roughly.

Liz Pierce – Roth Capital Partners

Okay. And when you think about the outlets that opened in the latter part of last year, are they – particularly as we think about the outlets that you just opened and you are planning to open, how should we think about getting to that mature volume?

Marc Crossman

Well, I can give you a little alternative. Right now, we talked about our – where our EBITDA margin is for our stores on a stores level basis, and we talked about them being right now in the kind of mid upper teens range. And the store we just opened in San Marcos, I think right now is running around 10%. You know that has only been open for a month. So we have seen that steadily go up. (inaudible) productive pretty quickly.

Liz Pierce – Roth Capital Partners

Okay. And I was actually walking through airport security, so on rate issue [ph], you said something about your non-denim was that – I didn't hear what it was, 20% of total sales?

Marc Crossman

20%, correct.

Liz Pierce – Roth Capital Partners

So, you came in at a little more than 2.5 million maybe? The press release, and I don't have the press release in front of me. So…

Marc Crossman

No, no. That is okay. Our overall business was roughly 4 I believe.

Liz Pierce – Roth Capital Partners

Okay, all right. Are you willing to give us any of that, and maybe if you did I will have to pick it up on the transcript by category, did you break it down?

Marc Crossman

No, we didn’t.

Liz Pierce – Roth Capital Partners

I think you did talk about the Legging, The T and The Pant.

Marc Crossman

Yes. We didn’t break it down by those. Really the Shirt, we had a decent amount of selling, because that was being delivered before The Pant, and The T. The T is just starting to be delivered. At least, we are just starting to see some selling on The T and The Pant is really delivering right now as we speak. So, you were telling The Pant and The T, their contributions in the quarter was $600,000 or somewhere in that range.

Liz Pierce – Roth Capital Partners

Okay. So this was mainly, with this and the jean legging, and The Shirt, between the two, or is it jean legging?

Marc Crossman

(inaudible).

Liz Pierce – Roth Capital Partners

Okay. And the jean legging though is not under denim. It is kept in non-denim.

Marc Crossman

That is in – yes, I mean we put that in another – a different classification.

Liz Pierce – Roth Capital Partners

Okay. So, $4 million basically, less $600,000 split between the other two?

Marc Crossman

Yes.

Liz Pierce – Roth Capital Partners

Okay. So, how is the – sorry?

Marc Crossman

I was just going to say that, yes, I mean the way to think about it is the jean legging was a bigger chunk of that. The lean legging was roughly just $2.5 million, roughly that number.

Liz Pierce – Roth Capital Partners

Okay. Okay. And if I – how are the bookings on that for, so how should we think about Q2, Q3 really for all the businesses?

Marc Crossman

Well, right now our total backlog. You know, this year we finished, and this last quarter it is 41% growth, and I think on the conference call I said that our backlog was up 29%, and as of last night our backlog is up 31% for the second quarter. They seem to be tracking nicely.

Liz Pierce – Roth Capital Partners

Well, okay. And all four of those new categories, kind of where you expected they would be?

Marc Crossman

Yes, and as we have talked about we really do think the legging business is going to be a spring and fall business. So as we are coming into the warmer months, we are going to see that level – the activity in that business come down, but then The Shirt and The T, certainly The Pants are going to pick that up.

Liz Pierce – Roth Capital Partners

Picking up. Great and what about the (inaudible)?

Marc Crossman

That is going to be shipping here at the end of April. That is going to be. We are going to co-mingle that in our denim.

Liz Pierce – Roth Capital Partners

That will be in denim right.

Marc Crossman

Yes. And we have a decent shipment coming out in April, but then the full collection that we are showing in fall.

Liz Pierce – Roth Capital Partners

Okay. And Hamish did you, when you were breaking out or talking about the G&A, the total SG&A was over 9.5 million rate?

Hamish Sandhu

Correct.

Liz Pierce – Roth Capital Partners

Okay. And I think once again bear in mind I was going through security, did you give between the two, between selling, I mean selling probably averaging around that 6%.

Hamish Sandhu

Yes, the selling is tracking around the 5.5%.

Liz Pierce – Roth Capital Partners

Okay. And then the rest of it. And that is really coming from just the added expense of new stores?

Hamish Sandhu

Yes, retail related installation (inaudible).

Liz Pierce – Roth Capital Partners

Okay. All right. I think…

Marc Crossman

And I would, Liz, I think I will just add one thing to that.

Liz Pierce – Roth Capital Partners

Sure.

Marc Crossman

On the SG&A side, we would like to see that number below, where we had two unusual items. One was the advertising expense. And the advertising expense is about $700,000 incremental to where it was a year ago, little bit higher than we had talked about. And then also we moved our corporate headquarters, and we had an incremental 150,000 or so of expenses related to that. So really there was about in total about $850,000 worth of expenses in the quarter that we're not going to experience that same impact going forward, certainly end of Q2 [ph].

Liz Pierce – Roth Capital Partners

Okay. How should we think about advertising then for Q2, Q3, Q4, et cetera in terms of increments?

Marc Crossman

Well, we had said that you know in the past that was running around 2% of sales. I think and I don't have the number off the top of my head, but I think it was somewhere around 5% of sales this last round. And it should come back down to 2%.

Liz Pierce – Roth Capital Partners

Okay. All right. I may follow up with you guys offline. Thanks.

Marc Crossman

Okay.

Operator

Your next question comes from the line of Ronald Bookbinder with Global Hunter. Please proceed.

Ronald Bookbinder – Global Hunter

Hi, yes. Congratulations on the terrific quarter. Did you talk about inventory, what was the inventory position compared to last year?

Marc Crossman

Hamish, if you want to go ahead and pick that one up.

Hamish Sandhu

Sure. Our inventory levels were roundabout 27 million compared to 23 million as of the end of last year. The growth has been entirely related to our finished goods of our new products that we're launching, as well as some fabric buys for the upcoming season.

Ronald Bookbinder – Global Hunter

And…

Marc Crossman

The way to think about that too is as we are bringing that product in, and we are just starting to ship out The Pants [ph] or the classification we have to bring those goods in well in advance. So, just based on where the timing is laid out, we had a decent inventory build even on a sequential basis. So we think you are going to see a couple of things. One, we will manage that inventory a little bit better, but you are also going to see incremental inventory on the store side.

Ronald Bookbinder – Global Hunter

Do you know how much of the inventory is for the stores of that 27 million?

Marc Crossman

Each store that we bring in – well, today we have got 6, 7 stores and each store has about 110,000 or 120,000 of inventory.

Ronald Bookbinder – Global Hunter

Okay.

Hamish Sandhu

But incrementally as we bring on additional stores, we will have roundabout 110,000 of inventory.

Marc Crossman

And we have been building up the inventory for nine stores that are pretty much going to open all at once.

Ronald Bookbinder – Global Hunter

And for those nine stores, how should we be thinking about store opening expense in Q2, shouldn't that be ramping up a little bit faster than revenues?

Marc Crossman

Yes, it is. The thing is these are outlets, so they based upon the timing of when we get them open, these things turn profitable pretty quickly from a P&L standpoint, from a GAAP P&L standpoint. So really it is going to depend upon how quickly we get it open. Desert Hills for instance, we took possession of that store and opened it in a week. So you really didn't have any significant preopening expenses. We went down there and hired the managers two days before we opened.

So really with this accelerated schedule it really comes down to how fast we take those action. In this case you know we are going to have about six of them, take possession of six of them and get them open before Memorial Day. So you're going to have your rent expense of maybe a month and a half on those six.

Ronald Bookbinder – Global Hunter

And you talk about the comps, how many stores do you have in the comp base. I would imagine it was extremely low and were there any geographical differences in the comp?

Marc Crossman

We are not there yet. In terms of size you are correct. There are four stores in the comp base, but yes, I mean it was up across the board.

Ronald Bookbinder – Global Hunter

Okay. And the profitability of the non-denim line. Do you segment that out? I know you have been ramping up the amount of designers, and you probably have a lot of sample costs and stuff right now, as you build this for the future, but is the non-denim segment of the business, is that profitable at this time?

Marc Crossman

You know, we don't have that segmented out. So, that is a tough one to answer. I think the only way to answer it is to say that we have had to add resources now. We are not adding resources to each division other than the person designing that, you know, pattern makers, sample pre-production, all of those. Those functions are shared across the entire company, and we have added to those to handle. There hasn’t been a like one for one, but we’ve had to add the expense so we don’t piece that out and separate it for you.

Ronald Bookbinder – Global Hunter

Okay. And what sort of tax rate should we be using for the reminder of the year?

Marc Crossman

48%. It should be 40%, but we – our earn-out from doing the acquisition of the Joe's business, we can’t – it is not tax-deductible, the earn-out that we paid that we do expense on our P&L. So it is usually inflated. It looks like 48%. But our cash taxes certainly aren’t at that level.

Ronald Bookbinder – Global Hunter

And then for the out year, we will be looking at something more back down to 40%?

Marc Crossman

Hamish.

Hamish Sandhu

No. Basically the earn-out has another seven years to run. So as the earn-out becomes a smaller piece of the overall profitability of the company, that expense piece becomes a smaller piece. The rate will start to eek down closer towards the 40%, but over a period of time.

Ronald Bookbinder – Global Hunter

Okay, great. Well, thank you very much and congratulations once again.

Marc Crossman

Thanks, Ron.

Operator

Your next question comes from the line of Jim Watkins [ph] with DFW Mentor [ph]. Please proceed.

Jim Watkins – DFW Mentor

How are you doing today?

Marc Crossman

Hi.

Jim Watkins – DFW Mentor

I just have a quick question about your shoe line. What is your emphasis going to be in the women's shoe market from here on out and are you going to be getting into the men's shoe market as well?

Marc Crossman

The men’s side we don't have plans at this point to get into the men's side of the business, although we like to. Right now the licensee we are working with are primarily focused on the women's side of the business. When you say emphasis, what do you mean by emphasis?

Jim Watkins – DFW Mentor

Well the shoe market is – I've always considered it to be a pretty broad market and women's shoes usually does better. So I was just wondering if you're going to be trying to expand on what you've been doing already.

Marc Crossman

You know, what they have – our first and we’ve a smaller collection for the ballet flats we did. But we do have for spring. We are shipping a full collection. So it is not just going to be these ballet flats, but we have a number of different styles that we are going to be offering. So there will be a full collection and we are going to be placing a lot of emphasis on importing them into our stores. We are getting tests with all the right department stores, especially stores that were definitely going to put a lot of emphasis on it. We think it only enhances the brand side.

Jim Watkins – DFW Mentor

Thank you very much.

Operator

Your next question comes from the line of Buzz Zaino with Royce & Associates, Inc. Please proceed.

Buzz Zaino – Royce & Associates, Inc.

Hi, did you say you were opening a store in Santa Monica Place?

Marc Crossman

We are.

Buzz Zaino – Royce & Associates, Inc.

Yes, that I think would be a dominant in terms of revenue contribution to the retail side. Any projection or thought process on what that could generate in terms of sales?

Marc Crossman

You know, it is a beautiful development. It is in an extremely busy area. They drop local van tourists. So, we do think it is going to do really well. We don't project on an individual store by store basis, but we are not looking to open up a store unless we think it can do $1 million. That said, I would hope we would do a lot better than that with that Santa Monica store.

Buzz Zaino – Royce & Associates, Inc.

Okay, the other questions were answered. Thank you.

Operator

Your next question comes from the line of Stephen Chang [ph] with Rutger Capital [ph]. Please proceed.

Stephen Chang – Rutger Capital

Hi, guys. Great quarter.

Marc Crossman

Hi.

Stephen Chang – Rutger Capital

I wanted to ask you was there any license revenue in the quarter?

Marc Crossman

Yes, there was.

Stephen Chang – Rutger Capital

Can you break that out or…

Marc Crossman

Yes. So, I was just going to make you ask that follow on question. The licensing revenue for the quarter was about 300 grand.

Stephen Chang – Rutger Capital

And that is from handbags, from shoes that kind of thing?

Marc Crossman

Yes, handbags, shoes.

Stephen Chang – Rutger Capital

And then it looks like – if you take out the non-denim categories, your denim business was still up 15% to 20%. Is that about right?

Marc Crossman

On the women’s side it was up about 6%. And that compared to – and I'm just going to give you a further breakdown of it. So, on the women's side, it was up about 6%. And on the men's side I think it was around and correct me if I'm wrong Hamish, it is somewhere 45% or so.

Hamish Sandhu

That is correct.

Stephen Chang – Rutger Capital

And your boutique business, you grew that nicely. Has the door count changed much or is it about the same?

Marc Crossman

No, the door count hasn’t changed. It has been pretty stagnant ever since we – ever since we have been tracking that in detail.

Stephen Chang – Rutger Capital

And last question, of your SG&A, can you break out approximately how much was retail?

Marc Crossman

It was actually down, and I'm going to have look up for you. Give me one second. The retail SG&A – accounted for, just bear with me. Retail SG&A was a little over $1 million.

Stephen Chang – Rutger Capital

All right. Thanks a lot, guys. Congratulations.

Marc Crossman

Thanks.

Operator

Your next question comes from the line of Brandon Austin [ph] with Benator [ph]. Please proceed.

Brandon Austin – Benator

Hi guys. Good quarter. Good growth.

Marc Crossman

How are you doing Brandon?

Brandon Austin – Benator

Just on the – hi, we are good here. We are good here. We got our Joe's Jeans. We have been doing okay. So just to clarify, like the marketing, you said $700,000 on advertising expense; so are you suggesting that's not going to go up from that or that $700,000 will just be not there, like SG&A will actually go down next quarter?

Marc Crossman

Yes, I would expect that we would be able to bring our SG&A down next quarter, again the G&A part, not the selling part, because that is just about how we do on the sales side. But you are going to have two expenses that are going to go in the other direction. We're not going to spend an incremental 700 on marketing and advertising. We do spend money on marketing and advertising. What I was trying to do is just piece out what we are spending on that campaign that we did around the jean leggings. And that campaign had a six-month life to it which is – it has come to an end. So we will still be advertising. And that is the amount that we are not going to see continue forward, and then move into the corporate headquarters is $150,000.

Hamish Sandhu

So, those are the two components that we're not going to have like for like next quarter.

Brandon Austin – Benator

Okay, and the jean leggings, sorry, that's not – jean leggings are included in your denim sales?

Marc Crossman

Our jean leggings are not included in the denim sales.

Brandon Austin – Benator

Not denim. Okay. And have you guys started to see any competition in the jean leggings yet that concerns you, so to speak? Because you guys are kind of first mover there?

Marc Crossman

Not on the jean legging side of the business, yes, jeggings. You know, we talked about how we made a conscious decision to really attack the jean legging market first. So we haven't seen a lot of competition. And there are some folks that have onesies and twosies, but no one that has a collection like we have. There has been definitely a lot of competition on the jean legging side of the business, I am sorry, on the jegging side of the business.

Brandon Austin – Benator

Jeggings side, okay. And on the earn-out, like how much was the earn-out in the quarter anyway?

Marc Crossman

They are Hamish about what, 2% of sales.

Hamish Sandhu

Yeah, it runs in 2% of sales.

Marc Crossman

On an annualized basis last year it was about 1.650 million.

Brandon Austin – Benator

Okay. And can you guys talk a bit about scalability? Because you open these new stores, they cost you a little money. But to the extent sales are growing at a fairly healthy clip, like where do you see your profit margins being able to scale to as you go through this fast growth phase?

Marc Crossman

Yes. Once you back out those expenses that we had from an EBITDA standpoint, the two we had just discussed, I think our EBITDA margin would have been somewhere around the 11% or so. Our store level margins. If you look at our overall retail business, it was running at around 7% or so, but the stores themselves are running in excess of double of that.

So we have got a pretty low hurdle to get over. So I think what we will see is that as retail business starts to pick up, you are going to see those margins really start to lift the overall company margin. That is how we went into that directionally, you know, and then certainly on our wholesale side of the business we feel comfortable that our margin should hold steady or start to rise this scale.

Brandon Austin – Benator

And with the recession last year, obviously a lot of retail guys are putting up fairly – I don't know if you saw some of the March numbers that came out this morning, but they were fairly big – they were big growth numbers for a lot of guys out there. I mean, how are you guys seeing the momentum vis-a-vis what you would normally expect seasonally going into the summer at this point?

Marc Crossman

You know, it is for us in terms of the momentum, what we are seeing is that light denim is really working for us right now in all kinds of different silhouettes, shorts, and kickers, and crops are really working. So we are seeing a lot of momentum going into the second quarter, which is really kind of a spring to summer for us. And really I was pleased that our business was able to support denim side growth, as it did coming off such a strong first quarter with our denim business, because we are able to hit all our stuff, a few orders that came in. So, we are seeing a lot of momentum going from the fourth to the first, and even into the second. So we feel really good about where we stand right now.

Brandon Austin – Benator

And where do you feel your channel inventories are at? Like do you find that customers are lean on inventories, but putting in a lot of replenishment orders, or where do you think all your supply chain is at in that sense?

Marc Crossman

No, I think we have done a good job of holding our stock to sales ratios intact. So, we are not driving 25% increases in our business with 40% increases in our inventory. In a lot of cases, we are actually seeing where our inventory, and again it does not roll over [ph] to pay from the retailer, but I would say in general we have been driving pretty consistent stock to sales ratios, and seeing the increases in our business, increasing with the same amount of inventory or slightly more. So, if we are growing 30%, then we are seeing our inventories grow 20%.

Brandon Austin – Benator

Great. Well, thanks a lot, guys. Keep it up.

Marc Crossman

Thank you.

Operator

Your next question comes from the line of Max Lerner [ph] with Max Lerner Inc. [ph]. Please proceed.

Max Lerner – Max Lerner Inc.

Hi, how is it going?

Marc Crossman

How are you doing?

Max Lerner – Max Lerner Inc.

Not too bad. Just a quick question for you, do you have any future plans in expanding into India and Asia?

Marc Crossman

Yeah, we certainly would like to. You know, it is not something that we have. I think we don’t have plans on the table right now.

Max Lerner – Max Lerner Inc.

I'm sorry?

Marc Crossman

It is not something we have any plans that we can announce. If it were, we would do it throw a distributor, but right now we don't have a distributor for those markets.

Max Lerner – Max Lerner Inc.

Thank you very much.

Operator

Your next question comes from the line of Michael Anthony a private investor. Please proceed.

Michael Anthony

Hello gentlemen.

Marc Crossman

How are you doing Mike?

Michael Anthony

Pretty good quarter there. I was looking at your revenue in the past and you seem to be debt free. Am I getting that correct?

Marc Crossman

Correct.

Michael Anthony

Will you be doing any borrowing to expand your business?

Marc Crossman

No, I think we have tried to maintain a fairly consistent message that we are not looking to do it either from an equity standpoint or bring on a significant amount of debt to our company other than what we did to our back up line [ph]. That said we are evaluating purchasing a headquarters. That would be the only thing that we would take on any debt.

Michael Anthony

Will you all maybe do a share offering to build more capital, to expand your business?

Marc Crossman

We have – I have tried to be consistent and clear as possible that it is work [ph] for us, and we are going to fund this business out of the cash flow of operations and not to the lose the existing shareholder base any further.

Michael Anthony

But can you give any guidance for the future?

Marc Crossman

The answer would be no. I mean right now there is no plans. We are not talking to anybody about doing it. We feel comfortable with taking our store base from 6 to 16 this year. Being able to do that out of our cash flow from operations, and I don't think you are going to see us open 40 stores in a year. But certainly with our cash from ops we can open 15 stores. I think we are not limited by capital, but limited by our personnel or resources internally.

Michael Anthony

To me, I notice – I'm sitting here watching CNBC. I've got the volume down and you all had a good quarter. I think you had an excellent quarter, being debt free. You've got a good management team, I see that; a very great team. And I notice your stock is down after hours; and to me, that doesn't make any sense. And your price as a stock to me is fairly cheap compared to other companies. Can you give me any remarks on that?

Marc Crossman

No, we can't comment on the stock price.

Michael Anthony

I think people kind of underestimate you. But long-term, since we're out of this recession, going forward, you all should do pretty well. And like you said, in marketing, you're not going to have much marketing going forward, will you?

Marc Crossman

No, we will continue to do what we have done in the past at those levels. But we don't have an extraordinary increase like we did over the last six months.

Michael Anthony

Okay. You did a great job, you did a great job last year because – during the whole recession. Other companies didn't do good, you all did. And I feel your stock is undervalued and that is my opinion.

Marc Crossman

Well, thank you very much. I appreciate that.

Michael Anthony

And you all did a great job, excellent job. Can you tell me – can I ask you one thing? The Street was looking for $0.01 per share. Did you all actually make more than that? I know (inaudible) revenues are totally and all.

Marc Crossman

Revenues – I am sorry. I can’t understand your question.

Michael Anthony

Well my question is…

Marc Crossman

You are asking if we earned more than a penny a share.

Michael Anthony

Right. Like on Yahoo! – you look to Yahoo!, you look at Joe's, and it's got – they all are estimated to make $0.01 and I know…

Marc Crossman

That is what we reported for this quarter.

Michael Anthony

Sorry.

Marc Crossman

That is what we reported for this quarter.

Operator

There are no more questions at this time.

Marc Crossman

Okay. If there are no more questions, I appreciate everybody joining the call. You know where to reach us. We will be more than happy with any follow-up questions offline. All right. Thank you.

Operator

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect and have a great day.

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