R.G. Barry's CEO Discusses F2Q 2014 Results - Earnings Call Transcript

Feb. 4.14 | About: R.G. Barry (DFZ)

R.G. Barry Corporation (NASDAQ:DFZ)

F2Q 2014 Earnings Conference Call

February 04, 2014, 09:00 AM ET

Executives

Roy Youst - Director of Investor and Corporate Communications

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

Jose G. Ibarra - Senior Vice President and Chief Financial Officer

Analysts

Jeff Stein - Northcoast Research

Jeff Bronchick – Cove Street Capital

Walter Winnitzki - Dover Road Asset Management

Operator

Good morning, and welcome to the R.G. Barry Brands Second Quarter First Half Fiscal 2014 Operating Results Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation there will be an opportunity to ask questions [Operator Instructions]. Please note this event is being recorded. I would now like to turn the conference over to Roy Youst. Please go ahead.

Roy Youst

Thank you, Garry and good morning everyone. By now, you would have had an opportunity to review this morning's earnings release. Our releases are available in the Investor Room at rgbarry.com. You can also contact us at (614) 729-7200 to be added to our electronic distribution lists. An audio replay of this call will be available shortly after its completion. Joining us on the call today are R.G. Barry Corporation’s President and Chief Executive Officer, Greg Tunney; Senior Vice President, Finance and Chief Financial Officer, Jose Ibarra; and Corporate Controller, Summer Cogar.

Please note that statements contained in this call which are not historical facts should be considered forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by forward-looking words such as may, expect, could, should, anticipate, believe, estimate or words with similar meanings.

Any statements that refer to projections of our future performance, anticipated trends in our business or other characterizations of future events are subject to all Safe Harbor qualifications set forth in our news releases, investor communications and SEC filings. Actual events affecting the company and the impact of those events upon our operations may differ materially from what is currently anticipated. For a list of some potential risk factors, please refer to our news release or our most recent Form 10-K.

Today, Greg begins our call from R.G. Barry Brands office in New York.

Greg A. Tunney

Good morning and thank you Roy and thank you everybody for joining us this morning on the -- I am actually in New York City at the Accessories Market Week where we are sitting down with top executives and buying teams from many of our key customers to discuss business 2014. Please bear with us as we go through the question and answers today because we are in different locations throughout the country.

I want to begin today by taking a moment to comment on the loss of our Chairman Gordon Zacks on Saturday following a brief illness. Gordon led this company for more than 40 years and was our final direct link to the company's founding. He was the person responsible for bringing me to R.G. Barry. Personally I can tell you that he was a wonderful mentor and a true friend to my family. I know I speak for our Board of Directors and all of our team members when I say his knowledge, advice and leadership will be sourly missed. On behalf of the Zacks and the R.G. Barry families I want to thank all of you who have expressed their condolences to us. We sincerely appreciate your kind words and thoughts.

As you saw in the earlier news release today the Board has named outside Director David Lauer as Interim Lead Director. David has been a member of our Board since 2003 and shares the Nominating and Governance Committee. He is a CPA and former acting Chief Financial Officer of the Ohio State University Medical Center, the former President and Chief Operating Officer of Bank One, Columbus and the former Office Managing Partner of the Columbus office of Deloitte & Touche. I plan to spend a few minutes today talking about something that Gordon was very excited about, the company's long-term future. But before we get into that José is going to give you some color on our second quarter and first six months, José?

José G. Ibarra

Thank you, Greg and good morning everyone. Our consolidated results were in line with the direction we provided during the last conference call. They reflect the impact of actions taken to strengthen our business in the long-term and the outside influences of various challenges faced by nearly all suppliers this year at retail. We reported net sales of nearly $48 million for the second quarter reflecting nominal net sales decreases in both of our business segments. Gross profit dollars were flat but the gross profit as a percentage of net sales rose by about 30 basis points to just over 42%.

The decline in gross profit dollars reflected a nominal reduction in net sales. Our expanded gross profit percentage reflected improved segment customer and product mix that's primarily resulted from our ongoing efforts to exit or better control underperforming areas of the business such as private label products in footwear and off-price retailers in accessories.

SG&A expense for the quarter was down about 10% with savings partially offset by continued invest spending in support for our long-term growth initiatives principally in the accessories segment. We reported slightly improved net earnings for the second quarter at just over $6 million or $0.53 per diluted share. For the six months, net sales were up from last year's level by about 6% at approximately $90 million. This shortfall primarily was a result of lower footwear sales in department stores, mass merchants and off-price retailers. The decline was partially offset by improved business in growth channels including warehouse clubs, Internet and international.

Six month SG&A expenses were down about 1% at nearly $23 million. Gross profit dollars for the half decreased nearly 4% to about $40 million while gross profit as a percentage of sales expanded 110 basis points to 44.4%. These results reflect lower sales volume and improved segment, product and customer mix.

Six month net earnings totaled approximately $11 million or $0.94 per diluted share. While this is approximately 5% below the comparable period last year it keeps us amongst the best performance in our peer group.

Turning to the segments, second quarter net footwear sales were relatively flat at about $39 million while six month net sales were off 7.5% at $71 million. Footwear gross profit dollars were flat for the quarter and down nearly 6% for the half while gross profit as a percentage of net sales improved by 30 basis points for the quarter to 40% and 90 basis points for the half to 41.1%. The improved percentages reflect favorable changes to the overall segment, product and customer mix.

Footwear operating profit in the quarter improved 12.4% primarily as a result of lower expenses. For the half, we reported a relatively flat footwear operating profit of $19.6 million.

In our accessories segment, net sales were relatively flat for both the quarter and the half at approximately $9 million and $18 million respectively. Although our decision to reduce sales to off-price retailers negatively impacted accessories net sales in the period and the decline was partially offset by higher accessory sales in the e-commerce and international channels. Gross profit dollars in the accessories segment were flat for the quarter and up 2.5% for the half to just over $10 million. As a percentage of net sales gross profit increased 20 basis points for the quarter to nearly 54.5% and rose 140 basis points for the half to nearly 57%. These improvements reflect positive changes in the mix of products sold.

We are very committed to our program of strategic investment in our brands with a goal of achieving long-term growth objectives. Accessories segment operating profit for both periods decreased primarily as a result of continuing invest spending in marketing, selling and other growth initiatives. For the six months, the accessories segment produced operating profit of about $1.8 million down $1.4 million from one year ago. The half also reflected approximately $4.1 million in unallocated corporate expenses down about $0.5 million from the first half of last year. The reduction primarily reflects lower bonus accruals offset by expenses relating to the ongoing due diligence activities for the unsolicited offer to buy the company.

The company’s cash position remains very strong. At the end of the first half, we had in excess of $43.5 million on hand, up more than $2 million from one year ago. As noted in today’s news release inventory position and our mix of inventory are properly aligned to support the business for the remainder of this year.

Net shareholders’ equity at about $96 million reflects an increase of nearly $13 million from a comparable period one year ago and we use tax rates of 38.3% for the quarter and 38.6% for the half.

Before turning the call back to Greg, we were very pleased the Board of Directors approved an 11% increase in quarterly dividends at its meeting last week. The dividend was raised from $0.09 per share to $0.10 per share or $0.40 per share on an annual basis. This was the fourth increase since the current dividend was put in place in May 2009. The company remains committed to gradually increasing dividends to shareholders who are conserving adequate resources to support strategies for growth through innovation, diversification and acquisition.

And now to Greg for some additional comments.

Greg A. Tunney

Thank you, José. If you have been with us for any length of time you have heard me say many times that ours is not a quarter-to-quarter business. In the accessory category there are short-term slings tied to outside factors like the economy and retail traffic. We do a pretty good job of managing for those uncertainties but there will always be some periodic ups and downs in our business but I thought overall our team did a good job of managing the business during the quarter in a very difficult retail climate during the holiday season.

We sacrificed some short-term revenue growth and profitability during this six month period, but at the same time we were investing in our long-term growth. Even with our investments during the half the company remains among the best-in-class in regards to profitability. To illustrate our peer group and the risk management association footwear group each had a medium three year average of about 4% on return on sales. For the past five years, we have significantly outperformed both groups with an ROS ranking 9% and 14% annually. That runs anywhere between 200% to 300% above our peer group.

On return on invested capital one of the most important measures in our view, our peer group had a three year medium average of about 8%. Our three year average was 22% over the past five years. R. G. Barry’s ROIC has ranged between 17% and 29% annually. We can afford to invest in our business without sacrificing the best-in-class performance that is why many of our products lead in their respective niches.

The retail market research firm NPD has just released its analysis of the slipper category for 2013. Dearfoams was the number one slipper brand at retail displacing UGG within the category. UGG of course continues to lead in the shearling boot and moc category. On the other front the NPD research was by the way is independently produced also shows that mid-tier department stores slipper business as a whole is shrinking and new channels like e-commerce are growing. These results support the initiatives we are undertaking to position our footwear business for the future.

While we are talking about footwear, we told you during the last quarter how pleased we were to have Lee Smith heading up our footwear business unit. Well it’s been more than 90 days now and I can tell you there is a real energy among the footwear team and more important excitement with our customers who have had a chance to work with Lee. Lee has looked at ways to improve our footwear business from concept through retail. His team has been able to strengthen customer relationships including Walmart, improve and clarified product offerings, enhance coordination with our overseas suppliers and totally reinvigorate this total operating division. The changes taking place will pay dividends for years to come and we could not be more pleased.

Jeff Cosgrove was named Head of our Foot Petals business unit less than 30 days ago. He brings a wealth of leadership and experience and much needed stability to this business unit. Jeff was our Vice President of Sales and Merchandising and Off-price Channel Sales and previously was Executive Vice President of Easy Spirit, Executive Vice President of Marketing and Sales at Rockford and held executive positions with Wolverine and Brown. Jeff’s primary task of Foot Petals is to move the brand from a cult following to a broader consumer awareness. He too has hit the ground running; he has conducted an analysis of his business unit and is focusing on brand building, product innovation and channel development. Welcome to the team, Lee and Jeff.

At Foot Petals product innovation has been an important part of the business. We have talked about it in the past at especially Technogel, it improves upon on gels in soles already in the marketplace and has had a very good launch than some of our better department stores. With this successful test Foot Petals will be expanding Technogel rollout going forward starting this February. I know Jeff and his team are very excited about the relationship with Karina Smirnoff of Dancing With The Stars, she has become the product spokesman and has been getting quite a bit of press on the social network.

Over in the bag business baggallini has been posting some impressive numbers in e-commerce area. Sales were up 90% year-over-year on our own direct website and up over 50% year-over-year with our e-partners. We continue investing for long-term growth in the bag unit. This year they are converting to our new ERP assistant moving shipping to our California 3PO and moving the Portland offices and showrooms into a new space, more appropriate for their business.

Another growth area for us is international. We just passed a one year anniversary of launching our internal full-time international team. The results have been very good in excess of 10% growth this year. We are expanding the footprints of our brands in Canada, Mexico and a variety of other locations market-by-market. We recently added a full-time expert in the Pacific Rim markets Nicole Wang who has experience with some of the top brands in Asia. She will be beginning laying the ground work for taking our products into those markets in a meaningful way.

Without a doubt one of the largest opportunities for e-commerce we expect for our business is both our owned and other retailers as our online stores to reach an excess of 10% or more of our total consolidated revenues for the year. We have recently added an experienced e-commerce professional to head up this area. Heather Richard has been with us less than 30 days but brings deep experience in building online businesses from e-tailers such as 1800 Flower Sears, K-mart, 1800 Basket and many others.

This is our third anniversary of acquiring Foot Petals and baggallini. I think you will agree that those businesses have been great additions. They have grown and have been accretive to earnings each and every year since we acquired them. They have diversified our product offerings and seasonality and now represent 25% to 30% of our annual operating profit of the company.

Our search for additional acquisitions continues. We have never had more or better potential acquisitions in our portfolio at this time. Although we remain disciplined in our approach to the acquisitions, we are more confident than ever that another deal is going to happen when we identify the right opportunity at the right price. Everything I have talked today ultimately relates to our commitment to invest in long-term growth throughout diversification in the business. Our business model generates strong operating cash and our balance sheet is very healthy. We remain confident that we have the financial and operational strengths to consistently reward our shareholders while growing our business long-term.

Finally you may recall we announced in late December that we had signed a non-disclosure standstill agreement with Mill Road Capital regarding their unsolicited and non-binding proposal to acquire the company. Mill Road currently is continuing the process at of diligence of the company, we will provide further comments or updates on the process when circumstances warrant. Analysis of the Mill Road offer is in the purview of the special committee of the Board of Directors and the Investment Banker P.J. Solomon. Management's focus has been and continues to be on increasing shareholder value while operating the business as efficiently and profitably as possible.

Now, operator we are ready for our first questions from our listeners.

Question-and-Answer Session

Operator

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Jeff Stein with Northcoast Research. Please go head.

Jeff Stein - Northcoast Research

Good morning Greg how are you doing?

Greg A. Tunney

Good morning, Jeff. You missed our last conference call.

Jeff Stein - Northcoast Research

Yeah I was travelling, sorry about that. So a couple of questions for you first of all wondering what your customers are doing with their inventory plans given the fact that holiday overall was fairly challenging for the retail industry and given the fact that your sell-through currently were pretty good. How do you feel about orders for spring and kind of looking ahead and what are your customers doing?

Greg A. Tunney

That's a good question Jeff. And as you can imagine going through the retail season we just did, everybody in the marketplace is talking about inventory. First and foremost we made some decisions in the season in November on certain levels of inventory and certain areas that we wanted to accelerate sell-through at retail and we actually implemented those strategies in November and they really paid off for us.

For what was a more than difficult holiday season especially in mid-tier department stores which if you look at the MasterCard data mid-tier department stores were down more than 4% for the holiday season. And I think by as accelerating some of those strategies on our inventory, we really came out of it with our retailers quite clean going forward.

Spring is a little smaller for us as a total business as you know Jeff. So our spring receipts are really in good shape and none of them are jeopardy. Our biggest challenge right now if you look at our total inventory is we had some replenishment programs with some of our major retailers that just didn't accelerate during the holiday, we weren't willing to promote those and things like that and that's why you see the profitability as healthy as it was during the tough season.

So our inventories are a little high but they are on key basics that we don't have concerns about that will go forward. And I will tell you only as it can happen in this business is we're in the market right now. People are thinking about 2014 and 2015 and moving forward and we've already had a couple of our key customers and we are looking at having growth plans for next season with them.

Jeff Stein - Northcoast Research

Okay. Would that be true both in the slipper business and the bag business?

Greg A. Tunney

I have only started the slipper side, so when I make that comment that is strictly on the slipper side. The bag business, we'll actually have those appointments starting tomorrow through the rest of the week but we've already had a couple of our key customers in on the slipper side, so that was my remarks too. But we've already said in the past that we continue to see our bag business growing healthy over the next few years and we don't see anything that would slow that down at this point.

And when you really look at what's going on with baggallini especially in dot com, it really translates very well to that channel and that's the channel that's growing so fast right now. So as you look at that baggallini business, our bag business doesn't rely on department stores or mid-tier channels to really drive their business, it's really more independence and dot com and international and that's where they are getting their growth from.

Jeff Stein - Northcoast Research

Got it. And one last question for you Greg. You talked a little bit about your focus on e-commerce and I presume that is related mainly to the bag business not the slipper business or am I incorrect on that?

Greg A. Tunney

The big growth that you are seeing are absolutely, you're correct it is in the bag business. We are not getting that type of growth I mean when you are looking at 90% and 50% those were strictly happening in the bag business. On the footwear thing we still are seeing growth but not to that level and we are still working with different modelings to figure out what is the best way of those price points to grow the business on dot com.

It's a little bit more of a challenge in dot com when you have average price points under $20 and the shipping charges are in excess of $5 to $7 whereas in the bag business they're going out the door at $100 to $150 we don't have that same paradigm that we have to deal with.

Jeff Stein - Northcoast Research

And final question, can you just update us on foot Petals and what's going on at Wal-Mart what kind of sell-throughs have they seen and are they expanding our program?

Greg A. Tunney

Yes. I will tell you that we have completed our test at Walmart and the thing that we found at Walmart is that they are looking at that product category at price points that are far below ours. When you look at our average point of sale on our products in there we’re anywhere from 50% to 100% above their private label business and that Walmart consumer what we found is that they are so price sensitive that the model really doesn’t work there.

When we go in department stores when we go into other retailers such as Target, they are not as price sensitive they are more brand loyal and so I would tell you going forward, we are not looking expanding that program at Walmart in fact we will wrap up this year. And until we’re willing to find products and price points that work in that channel distribution, right now we found that-that model just is not one that thrives there at those price points.

Jeff Stein - Northcoast Research

Got it. Thank you very much.

Operator

The next question comes from Jeff Bronchick with Cove Street Capital. Please go ahead.

Jeff Bronchick – Cove Street Capital

Good morning Greg and José and condolences for Mr. Zacks and secondly just again on the online, I guess what you just said in regard to baggallini is that given that is sold mostly widely to a variety of independents the whole idea of this less channel conflict selling baggallini through a department store and then selling the same thing online, is that correct and therefore when you look at acquisitions and accessories that’s sort of a model you don't necessarily have to look at an acquisition as to say how can I place it in the department store vis-à-vis this is a way to go?

Greg A. Tunney

Yes it’s a good question. We have found that whether it’s baggallini who has three thousand independents, whether it’s Foot Petals that has an excess, close to a thousand independent, we have found that you can grow business nicely it can be healthy and we don't have to necessarily rely on promotional department stores. Our focus is we think department stores are important parts. We are trying to focus our brands and brands to acquire in the future more toward non-promotional department stores such as Nordstrom, such as Dillard, such as Von Maur.

When you have a promotional department store cadence out there and you are in a big base of your business is either Internet or independent it just puts too much stress on the model and it really doesn’t work. So you got to realize in baggallini we have a channel and pricing policy out there that works very well so that we maintain integrity in our price points and those types of programs usually don't work with promotional department stores.

Baggallini just finished their first year of their new pricing policy and it’s worked very well, the consumers have been happy with it so they know that when they are buying it they are buying it at the right value and the retailers have been thrilled with it as well. So I think you will see us going more in more toward that type of strategy and that type of modeling for our brands and then last but not least is in the case of baggallini or any of our brand as you can imagine aswego.com, the vertical integration that we have in the margin level because we are going vertical is much more in line with what we want profitability wise for the company.

Jeff Bronchick – Cove Street Capital

And in regard to the “process” I know there is things you can and cannot say however, I do think there are things that you can say. And so my first question would be is this process what the special committee does, is it occupying 100% of the time in that you are not simultaneously and additionally looking at acquiring the acquisition program to plan the next baggallini where are the two totally independent?

Greg A. Tunney

That’s a good question. I would tell you right now that our whole modus operandi when this took place on September 11 of this year was to, and it was by direction of the Board was that we need to operate you know as normal and that’s the thing that we have try to do the best and as you saw in my comments today the Board has set up a special committee. They are focused with our Investment Banker on the process. And quite frankly management including myself, we are focused strictly on the business. We don't want to be distracted in this process, we think we've got a good Investment Banker and we think the special committee is very in touch with shareholders and what's best for our company going forward. So that's been the relationship in the process and that's how we want to keep it.

Jeff Bronchick – Cove Street Capital

I would tell you the special committee if they are listening and they probably are has not done a good job being in contact with the shareholders. And my point being at what one can articulate and has not in a process like this is already simply. My question would be, is the special committee specifically looking at this deal as the opportunity or no or is this a whole-blown process to explore all strategic options in the best interest of shareholders? That is what seems to be missing is un-clarified and is not being committed or is not being publicly stated by the special committee. So I would appreciate any comment you or anyone is listening may have or some further announcement post the call or in the Q that would clarify that because that's doable and appropriate statement for shareholders?

Greg A. Tunney

I think it is appropriate comment and I think we will share that with the special committee and we will make sure that, that gets communicated when it's appropriate. But I think it's a fair call out.

Jeff Bronchick – Cove Street Capital

Great, thank you very much Greg.

Greg A. Tunney

Okay.

Operator

[Operator Instructions]. The next question comes from Ethan Star a Private Investor. Please go ahead.

Unidentified Analyst

Good morning and my condolences to everyone at R.G. Barry on the loss of Gordon Zacks.

Greg A. Tunney

Thank you, Ethan.

Unidentified Analyst

I am wondering growth of the e-commerce. To what degree is the growth of the e-commerce -- on by the fact that people seem to be going less and less to retail stores?

Greg A. Tunney

I want to make sure I understand your question, Ethan can you kind of get a more definitive on that?

Unidentified Analyst

Well there has been reports that recently that the traffic at retail stores generally has been down, malls and retail stores has generally been down over the last three years. I am wondering to what, clearly e-commerce is growing is part of that shift, I am wondering do you see that continuing to happen?

Greg A. Tunney

Yeah, let me share you a couple of different areas that the experts that we deal with especially from MasterCard that are actually watching the transaction, it is kind of an interesting process. Dot com has been out there for 15 years plus and it's interesting that this the first year that department stores have their own dot com lines direct lines go. This was the first year according to MasterCard that actually the department store dot com sites actually outpaced total dot com. So it took them a few years but they actually got there.

So I think that's a healthy part, I think when everybody started this process, the consumer didn't have any money extra money to go forward, it was a matter of where and when they were going to shop. Probably the biggest trend that we see going forward that we think is going to continue to happen is when you look at the United States it's somewhere a little bit below 10%, somewhere around 10% that total dot com is driving consumer soft good business throughout the States.

When you start to look at places like Korea that runs 30%, Hong Kong that runs 25%, as mobile devices continue to increase, we believe in United States that 10% penetration level of dot com is going to go no differently than what some of the countries in the Pacific Rim have done. And so we see that over the next five to 10 year horizon it's going to continue to grow more and more.

So the importance of us investing, having the right structure, having the right team members that can drive that as the consumer starts to shift their buying patterns, we know that it's going to happen, it's just a matter of when and how much that penetration is going to shift. But if we look at some other countries around the world the United States is really quite low on their penetration level for dot com.

Unidentified Analyst

Okay. What are your prospects for getting back in with Dearfoams at jcpenney?

Greg A. Tunney

We are, are you talking about men’s?

Unidentified Analyst

Men’s, yeah.

Greg A. Tunney

I will tell you this season we actually did some tests in men’s in some stores that we haven't been in. For example we did a test in Kohl’s men that was absolutely outstanding we had a great season in men's so they're going to be expanding it. jcpenney it is a small market everybody knows where success is so they have actually reached out to us and said we want to reevaluate what we're doing with our men's program and how R.G. Barry can help in that. So we have open back up that dialogue and that interest that jcpenney has. And so my hope would be that we have some product at this market that jcpenney is going to be excited about. And that we can re-launch back into the men's program but it was nice to see us have the success that we had this year in men's. If you try to buy online with men's from us getting close to the Christmas period we were out of inventory on it. So it was a good season for men's.

Unidentified Analyst

Okay, good. During the call that you mentioned, maybe one or couple of calls ago you had some higher ends -- this past fall?

Greg A. Tunney

I think you are referring to a couple of seasons ago when we were doing some Carousel products. And we actually ended up doing a private label program that's what they want it to be going forward and we've made the decision to kind of step away from the private label business. So our goal is the long-term that we would be able to get our signature brand which is really segment for that better market and being non-promotional and we hope long-term that that's what we'll be positioned there as signature by Dearfoams in the Nordstrom channel. No, we did not have any this season.

Unidentified Analyst

Okay. How about signature by Dearfoams at any other channels?

Greg A. Tunney

Yeah we did we had it in the independence zone, we had it at Von Maur. So we started that process this last year was our first year of really rolling it out. And we did have success on it. And so we hope that, that segmentation strategy will continue to help us elevate price points and really make the brand a little bit more aspirational.

Unidentified Analyst

Okay. Are they available online any place?

Greg A. Tunney

It just depends on what season and what period that you can buy them but yeah you can actually buy them online.

Unidentified Analyst

But not from the dearfoams.com site?

Greg A. Tunney

Yes from the dearfoams.com site, you have to actually into the product and actually identify which ones are signature.

Unidentified Analyst

Okay, great. So maybe I missed this one during José comments can you go a little more depth on why SG&A dropped in the second quarter I mean was it just lower bonus accrual or was there other things as well?

Greg A. Tunney

Yeah it was a multitude of things I am going to let José kind of take you through that because it wasn't just one hit here on margin or whatever it may be. It was actually multitude of things so José why don’t you take them through the reduction of SG&A during the quarter.

José G. Ibarra

Sure a couple of big pieces there is in with respect to the bonus accrual that was one about $1 million. then you have about over $0.5 million of expenses being incurred to support these -- things that we're doing with P.J. Solomon and there are some other savings in some other areas but that's kind of the those two are bulk numbers that are flowing through the SG&A.

Unidentified Analyst

Okay, got it thanks. Back to the brands what's new with the KIVA and Mosey lines if anything?

Greg A. Tunney

Yeah couple of things that we're looking at is we're looking at actually a combination of a baggallini/KIVA, some of the experience that we had at the outdoor show we think there may be some opportunities to expand baggallini KIVA idea and at Mosey right now we're testing all-leather bag which they have not had in the past nor has baggallini so it's actually a new classification area for it.

We are looking at this year Nathan, we have had it under our belt now, one for nine months and the other one for probably less than that. And we're really looking at this year just evaluating those, understanding them. We brought in KIVA because it really helped us get into the outdoor channel and we brought in Mosey really for their, we acquired the whole sourcing team with that and their expertise in sourcing which we are already getting the benefit now and margins going forward.

And so now we're just evaluating one of those brands, what is the equity on those, how is the best way to place those in the markets going forward and ways that are placed within our brand portfolio that they belong in. I think as we turn the page going into July of this year going into our new year I think we'll have a clear idea of where we see those brands standing out for us in the future.

Unidentified Analyst

Okay, Great. And can you please add some more color on your comments the international business and the efforts to grow that?

Greg A. Tunney

Yeah I will differ that question to Jose who has been is responsible for international and he has been engaged in getting that team together. So I will let him take little bit of time and give some more color on international and then we’ll turn the question over to anybody else that would like to ask any question and if we need to Nathan we’ll come back to you.

Unidentified Analyst

Sounds good, thanks.

Greg A. Tunney

Thank you.

Jose G. Ibarra

Sure Nathan we’ve it’s been a year since we have hired somebody full time as we share in the call that supporting international business and we’re making very good progress in the two key markets that we talked about at the very beginning, which is Canada and Mexico. You know we have grown our businesses there, different areas with different channels and we are very pleased with where we are. You know we spoke about the international initiative as a long term strategy approach to grow our business outside the US and you know so far I couldn’t be any more pleased with where we are we are continuing to evaluate markets.

We recently hired somebody that’s going to support in the Pacific Rim area, you know we see great opportunities there. We are very strategic, we are very selective as to what markets we want to consider. We’re still under the notion of following our key retailers whether it’s Costco Wal-Mart, Sams any of those key customer for us where they have international footprint. We’re closely following them and we’re making great progress.

So we continue to be very excited. It’s an area where we continue to invest in resources to support the growth of that initiative and we still very-very happy you know the progress that we have made.

Operator

The next question comes from Walter Winnitzki with Dover Road Asset Management. Please go ahead.

Walter Winnitzki - Dover Road Asset Management

Hi, yes thanks and also I will let my condolences to everyone else on the call. First Jose just want to make sure I heard correctly. You said it was about $1 million kind of extraordinary cost associated with the evaluation of the acquisition proposal, was that correct?

Jose G. Ibarra

It was half a million.

Walter Winnitzki - Dover Road Asset Management

Okay, alright, great. I have two questions, first the decision to reduce some sales in the off price lower margin sales in the off price channel kind of clouding the accessory segment. Is there a way to discuss you know how sales are doing both at foot pedals and in the baggallini line in those channels that are not being affected by the trimming the distribution in those areas?

Greg A. Tunney

Sure Walter it’s you know if you really break it down pretty simply we if you take this first half of the year and you break it down baggallini had actually sales growth in every channel the distribution that they had except for one and we made a strategic decision that we thought long term it was in the best interest of the brand to drive more business to the discount channel, those people such as T.J. Max, Ross et cetera.

So they took off the table about $1.4 million strategically we made that decision upfront and they took it off the table. So if you look at that accessory area and just look at baggallini if we would have just you know annualized that normal business that we could have done there which we could have the sales really get kind of masked because once you put the $1.4 million in there they actually were continuing on their double digit growth that they have done for the last three years that we have owned them. So I think that that gives you as good a clarity as you can get in that situation but we made that decision strategically.

Walter Winnitzki - Dover Road Asset Management

Terrific, that’s exactly what I was looking for. Second is the Q is not out and I know you because are intensely focused on driving free cash flow. Maybe you can talk a little about cash flow in the quarter and I would assume all of these initiatives which are focused on improving margins will probably have a positive impact on free cash flow and you know in the second half of the year and thereafter?

Greg A. Tunney

Yeah I am glad you brought it up that’s what we like to pound our chest about. So I will let Jose kind of take you through our focus on that and what it will look like going forward.

Jose G. Ibarra

Yeah two pieces Walter through the half had a pretty healthy cash flow even with the season that we spoke about in terms of our receivables and inventories you know we came out very good very clean, nothing really got stuck back in the receivable that we couldn't collect or inventory position that we spoke about earlier is very clean as we ended up this season.

Going forward your Greg talk about spending on the things that we want to do and yeah cash flow is going to be impacted but rest assured and everyone else in the call that as we look at these capital allocation and growing these resources is very, very focused on those areas that we see great payback.

So it's more of spending that we're looking at measuring how we're going to get back a return on that capital that we deployed. So the models is very healthy our business continues to perform well it's a working capital model as you know and we're very, very happy despite some of the tough season and we're not where our cash flow ended for the half. And we're looking pretty good shape for the rest of the year.

Walter Winnitzki - Dover Road Asset Management

Okay thank you.

Jose G. Ibarra

Sure.

Operator

(Operator Instructions). As we have no further questions this concludes our question-and-answer session. I would like to turn the conference back over to Greg Tunney for any closing remarks.

Greg A. Tunney

Thank you and I thank everyone for participating on today's call in memory of Gordon Zacks and the great things that he did for our company and for our employees the flags at R.G. Barry at our corporate headquarters and other offices will be flown at half mast for the remainder of this week and until next. Please join us in May when we will have our report for the third quarter results. Until then thank you and good bye.

Operator

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

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