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Elizabeth Arden, Inc. (NASDAQ:RDEN)

Q2 2014 Earnings Conference Call

February 05, 2014 08:30 AM ET

Executives

Allison Malkin - ICR

Scott Beattie - Chairman, President and CEO

Joel Ronkin - EVP and General Manager, North America

Kathy Widmer - EVP and CMO

Marcey Becker - SVP of Finance, Treasurer and Corporate Development

Analysts

Arnold Ursaner - CJS Securities

Bill Chappell - SunTrust Robinson Humphrey

Jason Gere - KeyBanc Capital Markets

Joe Lachky - Wells Fargo Securities

Joe Altobello - Oppenheimer & Co.

Connie Maneaty - BMO Capital Markets

Linda Bolton Weiser - B. Riley

Carla Casella - JPMorgan

Operator

Greetings, and welcome to the Elizabeth Arden's Second Quarter Fiscal 2014 earnings conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host Allison Malkin of ICR. Thank you. You may now begin.

Allison Malkin

Good morning. Thank you for joining us. Before we begin, I would 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 is 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 Q2 conference call. Joining me today are Joel Ronkin, our Executive Vice President of our North American business; Kathy Widmer, our Executive Vice President and Chief Marketing Officer; and Marcey Becker, our Senior VP of Finance.

In terms of the agenda today, I would provide an overview of our Q2 and first half fiscal 2014 performance and a review of our international business performance for Q2 and the first half of fiscal 2014 as well.

I will then introduce Kathy, who will provide a brand marketing review of our fragrance portfolio and our Elizabeth Arden brand repositioning including the performance to-date of our flagship doors and the key Elizabeth Arden brand initiatives for skin care, color and fragrance.

Following Kathy, Joel will provide a review of our North American prestige and mass business including our direct-to-consumer business. Finally, Marcey will provide a detailed review of our key financial metrics.

In terms of Q2 performance, it was obviously disappointing and below the expectations and guidance we laid out during our Q1 conference call in late October. I would like to highlight the areas of the business that experienced weakness. The first and the primary weakness was our U.S. mass retail based fragrance business and specifically our basic stock planogram (Ph) in that business.

We normally experienced inventory built during November and December and this year with very conservative and replenishment orders were very weak through December. This reflected the reduced store traffic in many of our mass retail accounts, economic headwinds for our middle and low income consumers and specific retail unique execution weakness. The second primary weakness for us during the second quarter was our international fragrance business particularly our business in Europe and our distributor business.

The intense competitor promotional environment particularly in fragrance category in the U.K. and throughout Europe when combined with our relatively low market shares and operating leverage makes this business very sensitive to sales and gross margin swings. As I stated in our press releases, we’re actively reviewing that brand portfolio and brand investment strategy by channel of distribution and by geography to adjust our business model to return to more acceptable levels of sales and gross margin growth.

The challenge in the U.S. fragrance market is in many ways the antithesis of the challenge in the international market. In the U.S., we have a very strong competitive position across prestige, mass and digital channels of distribution for fragrances as well as a very strong brand portfolio. This business is very profitable and normally very predictable.

We do not believe there is a fundamental structural issue either with the North American fragrance market or our business other than the fact that it still has experienced slow growth in the fragrance category. The dynamics of the fragrance category are unchanged. And then we will benefit from a sustainable improvement in the U.S. economy. Nevertheless, we are reviewing this business for improvement. The international fragrance business in many ways is the opposite; it has a much larger potential market opportunity globally. The fragrance market is growing at a much more healthy rate, but we as an organization have a very fragmented business and very low market shares from a competitive point of view in most of the international markets with the exception of the U.K. And in order to drive more consistent growth in sales and profitability, we must make choices within our fragrance portfolio and by market where to investment.

We also must develop our distributor and strategic alliance in the international markets with partners that have existing commercial infrastructure and market share that we can leverage. Eric Lauzat, who has joined at the beginning of October as Executive Vice President of International, is actively addressing these challenges. He has recently announced the reorganization of our international commercial team, the essence of which is to elevate our strongest commercial leaders into regional responsibility. Eric will also have those regional managers report directly to him creating a more direct line of accountability and more focused commercial energy and accountability by region.

We are actively reviewing all elements of our business model and will develop an operating plan with our incoming Chief Financial Officer and our executive leadership team, which will drive improved revenue growth in gross margins for our fragrance business in terms of the Elizabeth Arden brand and its repositioning although the year-over-year growth rates moderated during the second quarter was driven by the weaknesses of its fragrance portfolio. We continue to see positive momentum and the key metric, and Kathy and Joel will provide a more detailed assessment of these metrics.

The primary focus markets for the Elizabeth Arden brand continued to be Asia, North America and the United Kingdom. These markets combined with travel retail business going forward will be the markets that attract the largest proportion of our A&P spend and corporate resources. As I stated again in the recent press releases fiscal 2014 gross margins and profit performance does not reflect the strength of our brands or our organizational capability. And we intend to make the changes necessary to put the business on its previous trajectory of growth and profitability.

I would now like to introduce Kathy Widmer, our Chief Marketing Officer to discuss brand performance.

Kathy Widmer

Good morning. I’ll first speak with the performance of our fragrance business followed by the Elizabeth Arden brand. As Scott has indicated year-to-date performance across our fragrance brands has been negatively impacted by headwinds in U.S. mass as well as by competitive pricing pressure in international. Year-to-date net sales across our fragrance portfolio were down 10% as shipments for most brands were soft compared to last year. Some of this softness was anticipated given the extraordinarily large influx of pipeline associated with key acquisitions last year as well as significant onetime distribution expansion of several brands including Taylor Swift, Justin Bieber, Ed Hardy, and Nicki Minaj. However, a weaker than anticipated holiday season and sharper traffic declines in U.S. mass than expected contributed to our shipment’s mass versus budget.

Joel will provide more detail regarding U.S. mass performance. In international particularly in key European markets, fragrance pricing deteriorated as a result of un-forecasted levels of competitive promotion. This drove higher dilution levels and margin erosion while we elected to limit our participation in this highly promotional environment, we did experience erosion in market pricing of our fragrances which we’re systematically in the process of raising to healthier level. We are currently developing a full range of new fragrance products for launch across several brands later this fiscal year which I’ll share with you in the upcoming quarter.

Moving onto the Elizabeth Arden brand, I’ll share performance by segment and an update on flagship to our performance and expansion of our repositioning efforts. Year-to-date net sales across the Elizabeth Arden brand were up 3%, driven by 6% growth in skin care, 3% growth in color, offset by softness in the fragrance segment which was down 1% or flat at constant currency rate. Arden fragrances were impacted by the same factors affecting the balance of our fragrance portfolio though positively offset by the global launch of our new pillar fragrance called Untold.

Performance across our global flagship doors where we’ve executed the most complete renovation of the brand continues to be solid. Flagship doors are up 20% reset to-date as compared to up 21% reported through last quarter. This growth is significant as the U.S. market left the one-year anniversary of the reset (Ph) this past October and continued to post year-on-year growth.

In the U.S., we’ve extended focus to an additional 132 doors which have delivered retail sales growth of up 10% reset to date. We will continue to monitor performance of the global flagship doors through this fiscal year. We are underway with our plans to launch Arden innovation later this year. We will introduce important skin care new, aimed at addressing the first signs of aging as well as extensions to the unfold fragrance line to provide scale and presence for the brand. This past Thanksgiving weekend we successfully opened our new salon and beauty boutique concept in Union Square, New York call the Red Door. The salon targets affluent urban professional women with up to the minute products and services designed around their busy lives.

Sales results in the salon are at target, products sales are strong and press launch in January garnered significant exposure for both the salon and the Elizabeth Arden brand. This concludes the marketing update; I will now turn over to Joel.

Joel Ronkin

Thank you, Kathy. I am going to discuss the performance of our North America business including sales performance in the prestige channel as well as the mass channel. The North America business comprised 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, I would like to make a couple of comments in overall performance. As previously disclosed for the first half net sales in North America declined by 9%, the declines of 3% in the first quarter and 13% in the second quarter. This performance was disappointing. In prestige, we had planned a decline in net sales as a result of fewer fragrance launches this year as compared to last year. And our overall performance in prestige was in line with expectations.

While we did plan the mass business modestly lower, net sales in the mass channel came in short of that plan. Given the importance of sales in the second quarter in that North American mass channel to our overall profitability, when we experienced a sales decline in that channel in the second quarter in particular, we realized significant negative operating leverage. Further, we tend to sell more classic brands in that channel, which generally are very profitable for us.

The relatively weak retail environment in North America factored importantly into our performance. More specifically retail sales trends among our accounts were very uneven with the mix of positive and negative trend over the holiday shopping season. The much anticipated late holiday sale surge never fully materialized particularly in the mass channel. As Scott was alluding to we believe a number of factors combined to lead to these poor trends including bad weather, slower store traffic, the continuing economic channel to mass consumer and a few retailer specific issues.

With respect to the migration to online purchasing, while a vast majority of our sales are currently in traditional retail environments we have a strong and growing e-commerce platform. This includes our own e-commerce site where we saw sales up 17% for the first six months as well as dot com sites of our retail partners where our business grew approximately 22% during the first half. This business represents approximately 6% to 7% of our overall business in North America.

Now turning first to the prestige business, net sales declined 6% for the half with 5% growth in the first quarter and a decline of 18% in the second quarter in line with our expectations. The decline was a result of lower fragrance sales due to an unusually high launch volume during the first half last year as compared to this year. As you may recall, we were up 35% in net sales in the first half last year and that’s what we were anniversarying.

Growth in the Arden counter business as well as the direct-to-consumer business, which includes our e-commerce business and our outlet stores, offset some of the declines we saw in fragrance. Retail saw sales of our Arden brand have performed well increasing by 4% in North America for the half, supported by the various sales initiatives we discussed in our last call and our ongoing repositioning activities. This was ahead of the category.

We also successfully opened a new counter at Macy's flagship store Herald Square in October and sales have increased to strong 27% for the first two months after experiencing months of negative trend, while we’re undergoing construction. At our new Macy's installation the flagship doors, sales are up 21% as Kathy was discussing earlier, intensification doors which include increased staffing are delivering very strong retail sales growth.

So, we are seeing good retail sales growth from our Arden repositioning activities. We also had some notable successes in prestige fragrances as well. As we talked about in the last call, the One Direction, Our Moment brand which distribute on behalf of another manufacturer was the number one women’s fragrance launch in prestige for the calendar year and ranked number sixth for the month of December in prestige, ranking just ahead of our own seventh ranked Viva la Juicy.

Our Juicy Couture and Viva la Juicy brand collections continue to perform well at retail with sales trends exceeding the category. Now focusing on the mass business, net sales contracted 10% for the half. You may recall that we are up 6% for the half last year with sales down 12% in the second quarter, a more significant decline that we had anticipated. The sales decline was driven by weaker than expected retail sales which in-turn reduced replenishment orders.

Overall our retail sales in mass were down 9% for the half. Now despite this difficult retail environment our key brands continue to dominate the rankings in the mass channel as White Diamonds incurred with the number one ranked women’s and men’s brands respectively for the 12th year in the row in the channel. And we own to distribute six of the top 10 women’s brands and six of the top 10 men’s prestige fragrance brands rank based on retail sales. And with that I would now like to turn the call over to Marcey Becker.

Marcey Becker

Thank you, Joel. I will discuss our second quarter results, working capital, cash flow and balance sheet metrics and non-Recurring items. For the quarter, net sales decreased 10.6% at GAAP rate and 10.2% at constant foreign currency rate. Gross margins after adjusting for non-Recurring items 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 product at higher margins, the highly promotional environment across retailers and markets and the impact of reduced basic product fragrance sales to North America mass retailers that Joel discussed.

Gross margins this year were also impacted by a higher percentage of lower gross margin distributed brands namely the One Direction fragrance which we introduced in North America in the fall and as Joel mentioned was the number one fragrance launch of last year. Recurring SG&A expenses were lower as compared to last year, the prior year include higher marketing and advertising expenses to support the significant launch activity. As a percentage of sales however advertising and marketing expenses were flat as compared to the prior year.

Recurring total indirect SG&A expenses as a percentage of net sales was slightly lower than the prior year at 11.7% versus 11.9%. Included and reported SG&A expenses for the second quarter is a reversal of the earn-out for Give Back Brands acquisition. When that acquisition was consummated it was structured with a three year earn-out based on net sales. The earn-out for the year was earned but based on current forecast it was a turn that this is not probable, that it is not probable that future earn-outs will be earned. As such there was a reversal of the contingent liability which resulted in a one-time gain of 17.2 million which was reported in SG&A during the quarter.

The increase in depreciation and amortization effects the incremental depreciation expense for IT and capital investment for the Elizabeth Arden brand repositioning. Regarding interest expense, it was lower due to lower rate in average borrowings and also due to the reversal of the interest accreted on the Give Back Brands earn-out. The adjusted tax rate was 16.1%, this lower than anticipated tax rate is due to mix of earnings.

Turning to the balance sheet, working capital and cash flow metrics. Cash flow provided by operations was $15.2 million as compared to a use of $10.9 million in the prior year period. Accounts receivable decreased 5% as compared to the end of the second quarter of last year and DSOs decreased by two days. We ended the quarter with inventory of $345 million which is $22 million above where we ended this time the prior year but is expected to normalize over the next several quarters. In addition to returning to more consistent and improved growth in operating margins and return on invested capital, the Company is also focused on driving operating cash flow and working capital improvements particularly as we head into the next fiscal year.

Year-to-date capital expenditures totaled $25.8 million which included investments in the EA brand including the new Fifth Avenue, Red Door Spa in Union Square in New York that recently opened and for IT including the implementation of the final phase of the Oracle enterprise system which is expected to result in a total capital outlay for the year of approximately $10 million. And we currently expect capital expenditures for this fiscal year to total approximately $40 million.

Short-term debt net of cash was 54 million at quarter end, slightly lower than the net debt position at 12-31-2012 of $57.5 million. In January this year, we issued $100 million add-on to our existing senior notes due 2021 to term out the capital use for acquisitions completed over the past several years. We have internally generated cash-flow in our credit line to finance acquisitions and periodically term-out this capital to the public debt markets. The notes were issued at a premium and had a yield of 5.6%, which is attracted long term after tax call for financing.

The proceeds were used to repay amounts up scaling under our credit facility and we currently have $225 million of availability under our credit lines. Our priorities for cash remains working capital and operations, investment behind the EA brand repositioning, acquisitions and share repurchases. Regarding the non-Recurring expenses, we expect to incur approximately $16 million of expenses related to the Elizabeth Arden brand repositioning of which $13.5 million has been incurred through the second quarter.

Finally, we have incurred restructuring related cost of $3.8 million so far this fiscal year primarily related to eliminating sales and direct overhead positions. And with that I will turn it back to Scott.

Scott Beattie

Thank you very much Marcey. Operator, we can open the call up for questions now.

Question-And-Answer Session

Operator

Thank you. Ladies and gentlemen at this time we will be conducting our question and answer session. (Operator Instructions). Our first question is coming from the line of Arnie Ursaner with CJS Securities. Please proceed with your question.

Arnold Ursaner - CJS Securities

International growth rates by region please?

Scott Beattie

Sorry, Ernie you were cut off to your question.

Arnold Ursaner - CJS Securities

Can you provide specific international growth rates by region please?

Scott Beattie

On a constant basis, Europe was down 7.6%, Asia-Pacific including South Africa was down 5%, Greater China was up 68% and our distributor and travel, retail markets together were down 6%.

Arnold Ursaner - CJS Securities

And just to keep, just a former U.S. growth rate?

Scott Beattie

The U.S. growth rate was down on constant at 8.6.

Arnold Ursaner - CJS Securities

Okay. And two clarifying questions from me, you mentioned the competitive price environment in Europe and I guess maybe you can help me better understand your business. Once you sale the product to a retailer, isn’t that price agreed on and then if he chooses to discount it why will that impact you?

Scott Beattie

It’s not quite that way Ernie. What we typically do is work with our retailers this time a year to develop a total seasonal program, a retail plan and that’s not much different in Europe versus the U.S. or anywhere else and that includes commitments to gift sets and promotions as well as what we think a normal build-up order of inventory looks like for the everyday planogram business or the existing basic stock business.

We didn’t experience much weakness in the drought down of the promotional business; the gift set business because that delivers high degree of value. But when we started to look at basic stock build up inventory that was very conservative, much below what we expected and then we normally get replenishment orders through the season as well from mid November rate through to the early part of January. And based on the sell through we didn’t receive those basic stock replenishment orders which are very high margin. And if we did get those orders they were at, they wanted that basic stock at a lower discount to reflect the competitive environment. And as Joel and Kathy mentioned, we decided not to reduce the prices on some of that.

Arnold Ursaner - CJS Securities

And final question is just as a follow-up to that. Customer inventories obviously the sell through wasn’t what you expected, the holiday season wasn’t what the retailers expected but you are up against a really easy comparison year-over-year when you had this issue hit last year. But yet you mentioned last year 20 million, 30 million revenue in Q1, calendar Q1 and Q2 can have an enormous impact because you can’t address your cost structure. I know you don’t want to give more formal guidance but could you comment on how this should impact the second half of your year?

Scott Beattie

Well, as we move into the second part of the year obviously we start to lap easier comps across a lot of our business. But in the first half performance and particularly the second quarter performance is something that even easily made up in the second half. We are starting to gain a little bit more confidence in terms of the levels of replenishment and performance in our key fragrance businesses. But as you can see from the overall economy and the overall markets, there still remains a significant amount of caution and uncertainty as it pertains that consumer behavior and consumer takeaway.

I will not provide excuses but there is a lot of both retailers as well as other categories of merchandise that have experienced quite weak performance driven by the same factors, reduced consumer traffic as well as reduced levels of consumer purchasing. And that’s the primary reason right now that we are cautious in terms of our outlook.

Operator

Thank you. The next question is coming from the line of Bill Chappell from SunTrust. Please proceed with your questions.

Bill Chappell - SunTrust Robinson Humphrey

Good morning. Scott, can you talk a little bit more about I mean or give us some more color or timeline on kind of some of these changes especially to the international business. I mean with the holiday season over and clearly you have had heads of international now in place, are you waiting for the new CFO to do this, should we hear about it by the time you report the next quarter or will be fiscal year end? And what kind of, give us some kind of guide to us that we can look out for, to kind of be more optimistic about that?

Scott Beattie

Well in terms of the commercial execution of the business, we are moving full steam ahead both in international and here domestically. we’re prioritizing our high performance brands and the repositioning of the Arden business and the executive team I am very confident including Eric, but also the rest of our team Kathy, Joel, Pierre Pirard from supply chain and Marcy and the finance team are not sitting, waiting just for the CFO to arrive. So we’re moving ahead on that. What I don’t want to do is start creating a premature budget for 2015 and a complete turnaround plan for our business without the endorsement and full review of our new CFO. It will be unfair to him, it will be unfair to our organization and frankly I want to make sure that we have complete alignment organizationally in our plan moving forward so that not only our organization endorsing and drive for executional excellence but we have confidence and our shareholders and analysts have confidence in the execution of the business so that we’re not needing or missing future guidance.

That’s been I think all our collective frustration here and is that we need more confidence in forward visibility in our business and more consistent execution across all elements of our business. And we’re going to get that, there is -- I have no concerns over that but we want to do it in a way that we’re absolutely satisfied not only that we can execute for ‘15 but for ‘16 and ‘17 and how to get ourselves back on a very systematic improvement like we did from ‘07 and ‘08 and systematic improvement in gross margin and EBITDA margins, and return on capital.

This is 90% of gross margin issue and we have got to address that and we have got to improve our commercial execution.

Bill Chappell - SunTrust Robinson Humphrey

So you think we can update by next quarter or more of a yearend fiscal ’15 start type.

Scott Beattie

We’ll do it as soon as quickly and as soon as we’re ready to do it in a way that meets their requirements that I just laid out.

Bill Chappell - SunTrust Robinson Humphrey

Then in terms of just trying to understand inventory in the channel, I mean can you may be address?

Scott Beattie

Very low, inventories are very low across -- particularly across the mass retail channel. And internationally as we have always said it’s much more difficult to see through to retail inventories because of the business model, everyone has not just ourselves where you are using distributors, you have to travel retail customers that have multiple -- lots of locations geographically around the world and where there is just not the same level of retail transparency in data. But I would say generally that inventories are not an issue at retail.

Operator

Thank you. The next question is from Jason Gere with KeyBanc Capital Markets. Please proceed with your question.

Jason Gere - KeyBanc Capital Markets

I guess I'm just following up maybe on Bill's question a little bit when you think about the inventory out there, the second half of the year how are you thinking about just replenishment? I understand the need not to provide kind of the guidance for the back half. So I guess I'm just trying to think about the sales growth expectations and trying to set expectations moderately at this point so we can get a better sense of the modeling. So I was just wondering if maybe you could just talk about how you are thinking about what type of replenishment we might see in the back half of the year.

Scott Beattie

We’re not going to provide partial information, that’s worse than providing no guidance in my opinion. So I would not as we’d say, the only thing I will say is that we’re anniversarying weaker performance from this time last year and so that should -- and the fact that the inventories are not as at retail particularly in the U.S. and it is not a problem. But I don’t want to get into, as they say worse to provide partial information. We will provide a plan as soon as we’re able to provide that plan and that when we’re totally aligned, you can understand it’s unfair to bring in a new CFO and then put out partial information.

Jason Gere - KeyBanc Capital Markets

No, no, I understand. It was worth a shot. I guess the second question is really talking about the gross margin opportunity because I guess my understanding when you had the global reengineering you were able to kind of take a lot of the cost out, get the supply chain correct and a lot of it was once you got the volume, the gross margin would be there. So I was just wondering if you could provide maybe some context into what are some of the things that are still there in terms of cost cutting on the gross margin side that are unrelated to maybe the sales coming back that you think you can do?

Is there still opportunity there or is this really still kind of the gross margin upside prevalence or predicated on really the topline starting to re-accelerate and that is when you will you will see that come back? I was just wondering if you could maybe provide a little initial color on that.

Scott Beattie

Well, I would say that all of the savings that we put in place during our global engineering initiative are there plus some. So in terms of those issues they have not been loss, there has been sort of leakage or dilution in terms of that being a cause of the redaction in gross margin. The primary weakness in gross margin is been the weakness in replenishment and inventory of our fragrance business in mass retail. That business, as Joel mentioned we have very high market shares, many of the brands are classic brands that have very consistent levels of sales they don’t require the same of innovation and A&P spend have very attractive cost of goods and when we lose some of that volume that has its proportional impact on gross margin. The other piece as I outlined is in our international business and we have commercial execution issues in terms of how we’ve gone to market in terms of pricing some of our fragrance brands particularly around the world and we need to improve pricing and we need to improve commercial execution.

Eric’s assessment of our business in international and as obviously he benchmarks that against his experience at L’Oreal prestige division is that we have very strong brands, we have very strong capability in the organization and the people, we have poor commercial execution and we’ve got to improve that, we’ve got to improve the way we price our products, the mix between promotions and basic and we’ve got to tighten up some of the distribution of some of our brands so that the margins are improved and we are undertaking that and executing that and that’s part of the reason why we didn’t sort of engage in some of the additional discounting that was going on during the second quarter because all I would have done is prolonged recovery frankly of our gross margins.

Operator

The next question is coming from the line of Joe Lachky with Wells Fargo. Please proceed with your question.

Joe Lachky - Wells Fargo Securities

Thanks. Obviously you are not giving guidance but I was hoping maybe you could give a little bit of color particularly on the interest expense for fiscal year 2014 and maybe the tax rate as well?

Marcey Becker

Yes. With respect to interest expense approximate it will be 2 million higher in fiscal ’14 and $4.5 million higher in fiscal ’15 as result of the financing. In terms of the tax rate absent discrete items the tax rate would approximate the Q2 tax rate but after discrete items which we expect to book in third and fourth quarter the full-year tax rate will approximate our originally estimated tax rate of 23.5% to 24%.

Joe Lachky - Wells Fargo Securities

Okay, thanks. That helps. And Scott, I want to get back to something you said earlier about your confidence in improving your ability to have forward visibility and improving your consistence in execution. So I am wondering what gives you confidence there because obviously you haven't had much near-term visibility recently. And as far as execution, it seems like a lot of your issues especially in U.S. mass aren't necessarily in your control. So I guess I'm just trying to get to the root of your confidence here.

Scott Beattie

Well, I would say look back to ‘08 and we had 27 quarters where we executed revenue growth. I’m sorry, 16 quarters where we executed year-over-year revenue gross margin improvement and EBITDA improvement. And so as an organization we know what’s new to happen to do that. There are two fundamental issues, one as you -- and I would not disagree with you that as I said in my opening remarks our U.S. mass business is in structurally impaired or has deficiency and execution capability but it has had weak performance because of lot of kind of macro issues and there is somewhat out of our control. Our reality is that we’re not only lapping very high anniversary pipelines as Joel mentioned with the acquisitions we doing well so anniversary weaker performance from some of our major mass accounts. So, I think we’re pretty confident that we’re tracking out a base that we could build from and at that point we adjust our organizational spend and so on to reflect that base.

In international I think its quit a different story, we need to -- we have a very fragmented business across a lot of markets and a lot of brands and we’re very sensitive to overhead absorption rates based on gross margin and sales volumes and we have got to fix that, and as I outlined in my remarks the dynamics of that market given our low market shares as well as the growth of both fragrance and skin care globally, there is a multi prong approach, one is to leverage more distributor relationships and what that does for is it allows us to leverage their commercial infrastructure on a variable cost basis. So that it provides immediate profitability to our business, albeit at a lower level of revenue and earnings contribution that is successfully operating affiliate. But there is less risk and there is more earnings contribution.

And the second thing is to improve the distribution of some of our brands so that we have higher prices and higher margins and we know how to do that, we know where the issues are and it can’t be done in a quarter too but it can be done over four or five quarters and we’re already undertaking that effort.

Joe Lachky - Wells Fargo Securities

Great. If I could just ask a question on US mass, I know you have gone over it in a lot of detail here. But I am wondering if there is anything you can do from your end to really improve the category results? And I would imagine you have some pull given you are the category captain at the biggest mass retailer and I know in the past, you have mentioned certain initiatives, displays, et cetera. But I'm wondering if there are any plans from your end as far as execution goes to try and improve the fragrance category at mass?

Joel Ronkin

This is Joel, keep in mind that there are many accounts that are performing well and actually had positive sales results in the first half. Just on average the category on our business did not perform as well as we had anticipated or would have liked. And also keep in mind that last year we are anniversarying huge launches of Taylor Swift and Justin Bieber into the Mass channel. So I just want to also keep that in mind. But yes we’re working with each one of our accounts on various initiatives, they differ by account, and some of the issues are merchandising opportunities, some of them are marketing, taking advantage of the different platforms they have and some of them are inventory opportunities and pricing opportunities and things like that. Each one is different and it will be hard to sit here and say yes here is the magic wand to how we deal with the issues.

So like I said a number of them are not broken there are number of our accounts have had significant increases. Few of our larger, we have had some challenges, some of which are macro issues that we can’t solve. But we have huge category awareness issues in math even with our dominant market share. The vast majority of people that walk in to a number of key mass retailers don’t even know prestige fragrances are sold in those accounts.

So much of our activities right now are really focusing on how do we take advantage of the traffic that is there. Even with declining traffic the percentages in some of our accounts has less than a 50% awareness of the fragrance category. So how do we take advantage of the traffic that is there to let them know of the offering so that our sales can go up because there is not a market share issue for us?

The good news is our accounts are very committed even the ones with tough comps for the last year or two. So that is encouraging but you are right we do have a responsibility and we certainly have a lot at stake when -- and growing the category with our accounts and I think they are pretty minable to listening to us and to things to do to grow the business there.

Operator

Thank you. The next question is coming from the line of Joe Altobello with Oppenheimer. Please proceed with your question.

Joe Altobello - Oppenheimer & Co.

I just want to go back to the international side for a second. It sounds like, Scott, if I understand you correctly that you really want to reduce the fixed costs and the infrastructure you have got internationally to sort of reduce that fixed cost leverage that is working against you right now and rely more on distributors. Is that a fair assessment of what might happen in that business for the next couple of years?

Scott Beattie

I think what we’re looking to do really is our incremental revenue growth will depend and will be focused much more on leveraging third party distributors and other commercial relationships in those markets. Remember, we’re not for the Arden brand for example; we’re not in for the top five beauty markets. Our fragrance portfolio is somewhat similar. So what we need to do is to develop those commercial partnerships with distributors with other kind of commercial partners like retailers where we provide exclusivity, it allows us to play above our fading (Ph) if you will from a market share and a commercial capability point of view without investing in our own affiliate structure because essentially that overhead structure takes time to build and takes time to build market share and success and also takes money away from peeling the awareness and share of voice of the brand. So, we are going to migrate much more and that’s not an unknown model to us. Okay, we have relied on our affiliate structure to execute the Arden business and then over time layered fragrances on it. In some markets it’s performed extremely well, in other markets we have struggled to gain the kind of critical mass and operating leverage to deliver consistent revenue and earnings contribution.

And we are at a stage now where we have got to look at that in a very, very objective way and see for incremental growth in incremental markets that we’re identifying for growth, how can we do it faster and more profitably. And even if we give up some of the upside in terms of the brand performance there is less risk, it can be accelerated more quickly and it can be done more profitably, more quickly.

Joe Altobello - Oppenheimer & Co.

Okay, that’s helpful. And then just switching gears to North America, you pointed out that this holiday season for a lot of companies has not been great and I think traffic across a number of retailers has been down and I know the weather wasn’t great. I know there were fewer sales days this year between Thanksgiving and Christmas. But why do you think that the U.S. mass customer, this year was notably weaker versus last two or three years for example?

Scott Beattie

I think I mean as Joel and I both mentioned we had, there is mass retailer specific issues but there is also some significant macro-issues, disposable income for a large percentage of the American employee population hasn’t grown since ’08. This is an issue that’s front and centered politically is that haven’t had not and there is a large percentage of those that middle-income, lower-income customers that are the primary traffic for mass retailers that haven’t seen growth in income. They have seen food stamps decline and they have seen payroll taxes increase and it’s essentially taken money out of their pocket for discretionary purchases.

And I think when you hear those retailers report which we’ve heard over the last several weeks, you are seeing that in their results and you are seeing that in their commentary. It’s not again something that’s you need to ask as a category. So, I think we can’t sit around and hope that income increase and the economy improves and all of those things were actively affecting our business. As Joel said we are either finding unique creative ways to convert more of the traffic that’s in the stores or finding ways to create promotions and activity that is exciting to that consumer? And we are also doubling up on the efforts with our retailers that are growing substantially which are a number.

In addition to their online platforms which are growing substantially, there are specific retailers in our category that are growing substantially. So, it’s a matter of reinvesting with the ones that are growing and finding unique ways to make some of the other ones that are challenged more competitive.

Joe Altobello - Oppenheimer & Co.

Okay. And just one last one for Joel in terms of housekeeping, I think you said your North American mass sales was down 13% in 2Q is that correct?

Joel Ronkin

That’s correct.

Joe Altobello - Oppenheimer & Co.

And what was the category?

Joel Ronkin

The category was a little bit less than that and I don’t have it exactly for the quarter. They will be a little bit less and we’re little worse overall for the half.

Joe Altobello - Oppenheimer & Co.

So, category was down 10 for 2Q?

Joel Ronkin

I don’t have that.

Joe Altobello - Oppenheimer & Co.

Do you have it for the half Joe?

Joel Ronkin

Yeah, it was down mid single-digits for the half like about 5% or 6%.

Joe Altobello - Oppenheimer & Co.

And what are we down for the half?

Joel Ronkin

9.

Scott Beattie

So, I think that’s the more indicative number.

Joe Altobello - Oppenheimer & Co.

Okay.

Scott Beattie

Category down 5, 6, we are down 9, most of that is due to anniversarying those pipelines of celebrity that we put in both Bieber and Taylor Swift last year. So, it kind of normalize out that big pipe and additional promotions that came with that last year, there is not a significant erosion of market share.

Operator

And our next question is coming from the line of Connie Maneaty with BMO Capital Markets. Please proceed with your questions.

Connie Maneaty - BMO Capital Markets

Good morning. I just have two quick questions. Do you think the portfolio review and the organizational changes you are making will be accompanied by charges?

Scott Beattie

I don’t want to sort of get ahead of ourselves, I want to put the whole plan together and I want be able to present the whole plan in partnership with our new CFO and rest of our executive team.

Connie Maneaty - BMO Capital Markets

Okay. The second question is different. I am wondering since there was so much expectation a year ago about the Justin Bieber fragrance if it is actually meeting expectations once you exclude all of the category weakness? Or our consumers souring on him because of all the bad headlines and bad behavior?

Scott Beattie

It’s not meeting the expectations that we had. I’m not so sure that I would just make the connection that his behavior and his all sort of popularity is the issue, I think the issue of the celebrity fragrance category expansion particularly internationally is a challenge and there are certain markets where these are attractive opportunities but there are other markets where it the cost of building market share and creating demand is probably not worth the investment and we’ve learned a lot from this one direction fragrance launch this year in terms of how they go market and how they supported and I think as part of our brand review process that Kathy and Joel and Eric are doing that would be one area that I think will be sort of more opportunistic and we’ll design our brands and our innovation and every element differently than what we have today.

Operator

Thank you. The next question is coming from the line of Linda Bolton Weiser with B. Riley. Please proceed with your question.

Linda Bolton Weiser - B. Riley

I was just curious about your thoughts on the competitive pricing environment and kind of what that means? Because that is something you can't really control. These are your competitors and who knows why they are behaving like they are but it could persist it seems for quite a long time off and on in which case how do you combat that? Do you -- again getting back to the issue of cost structure, do get your cost structure down so you can compete in that environment more effectively or do you just decide to give up pieces of the business you don't want to compete in? But long-term, do think the business is really structurally changing because of the competitive behavior of your competitors?

Scott Beattie

I’m going to let Joel talk a little bit about the pricing; I don’t think that the industry as a whole is changing but the whole beauty industry whether its masstige or prestige based on the current environment. I think what we need to do is identify which brands were dedicated to prestige distribution and pricing and innovation and cost of goods and which brands within our portfolio are exclusively in that channel of distribution. Which brands should be structured from an innovation cost of goods and promotional point of view for the masstige distribution and which ones should be pure mass distribution and I think we probably have some brands that should be prestige, that are being priced in the masstige channel and which probably had some that are masstige that should be in mass and vice versa. So, I don’t think you can kind of generalize across our whole business and our whole portfolio. I think what we’re going through right now is complete review of where our best opportunities by brands, by channel, by market and get a complete alignment organization and Kathy and her marketing team can innovate accordingly and we can pricing, and commercially execute accordingly.

Joel do you have any?

Joel Ronkin

In North America we definitely saw our retailers discounting earlier and in some cases discounting where they hadn’t in the category I think there was some fear given the amount, there were some weather issues as the fear of less number of days so they tried to get ahead of it. I question whether that will continue just based on conversations I’m hearing with some of those retailers but it certainly impacted the first half for those retailers and we saw it to a level in some cases that we hadn’t seen before.

Operator

Thank you. The next question is coming from the line of Carla Casella with JPMorgan. Please proceed with your question.

Carla Casella - JPMorgan

Hi. You have talked a bit about this but on the Internet side which you said is now dot.com 6% of sales, where do you think that could go to in the next one year to three years? Does that change the way or the turns in your inventory, in terms of -- does that change your inventory management?

Scott Beattie

Well, Carla we sort of benchmarked the numbers for the ecommerce based economy to total retail sales and it’s about between 6% and 7% right now and if the numbers that we look at and so I don’t think within our category that we would get ahead of the overall proportion of ecommerce to total retail sales in the U.S. market.

Now there are markets where there is not as established retail infrastructure where ecommerce actually offers higher rated growth and a higher proportion to total retail sales and so I think we take that into account in terms of how we deploy our commercial strategy in those markets. But as it relates to the U.S. I don’t -- there is always room for us to improve every element of our business but in terms of our strategy in ecommerce we’re teaming up with the best retailers with the best ecommerce capability as well as developing our own capability and so we’re playing in that ecommerce space in a very, very competitive way with our large selection of our brand, particularly on fragrance.

In the Macys.com platform, you know there are fragrances we offer on that aren’t actually offered in all of the stores and our Arden business on Macys.com is actually performing even better than it is in the repositioning numbers. So, I’m confident that we’re doing the right things. But like all companies we need to continue to invest in ecommerce and digital marketing capability within our organization and Kathy and her team are doing that.

Carla Casella - JPMorgan

Okay, great. Then on the Elizabeth Arden repositioning, are you fully penetrated now in terms of the U.S. doors or I guess where are you in terms of what inning I guess are you in with that? Is the mix shifting as you continue to reposition doors? Has it changed from your original plan?

Scott Beattie

In terms of where we are at, we still have quite a few doors and we have not touched in a meaningful way to such as the non-intensification, non-flagship doors. As Kathy mentioned we have about 15 to 20 flagship doors in a 132 intensification doors, we services close to a 1000 doors in prestige. So you can see we’ve quite a few more to go. Of course we’ve focused on the bigger ones first but certainly we also see a big opportunity to grow our business in all and particularly behind the skin care portion of our business.

Operator

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

Scott Beattie

Thank you very much everyone for attending today.

Operator

Thank you. Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. And thank you for your participation.

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