Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Kenneth Cole Productions, Inc. (NYSE:KCP)

Q1 2010 Earnings Call Transcript

May 5, 2010 8:30 a.m. ET

Executives

James Palczynski - IR, Integrated Corporate Relations, Inc.

Jill Granoff - CEO

David Edelman - CFO and Treasurer

Analysts

Jeff Van Sinderen - B. Riley

Scott Krasik - BBT Capital Market

Ken Stumphauzer - Sterne Agee

Janet Kloppenburg - JJK Research

Operator

Good day, ladies and gentlemen, and welcome to the first quarter 2010 Kenneth Cole earnings conference call. My name is [Katie] and I will be your coordinator for today. At this time, all participants will be in a listen-only mode. We will be conducting a question-and-answer session towards the end of the conference. (Operator Instructions) I would like to now hand the call over to your host for today, Mr. James Palczynski. Please proceed.

James Palczynski

Good morning, everyone. Before we get started, I’d just like to remind you of the company’s forward-looking statement disclosure. Statements made in today’s conference call, which are not historical facts, may be deemed to constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Actual future results might differ materially from those projected in such statements, due to a number of risks and uncertainties, including but not limited to, demand and competition for the company’s products; the ability to enter into new product license agreements or to renew or replace existing product license agreements; changes in consumer preferences or fashion trends; delays in anticipated store openings; and changes in the company’s relationship with retailers, licensees, vendors and other resources.

The forward-looking statements contained in today’s call are also subject to other risks and uncertainties that are described in the company’s reports and registration statements as filed with the Securities and Exchange Commission.

With that out of the way, I'd like to turn the call over to Jill Granoff, Chief Executive Officer.

Jill Granoff

Good morning and thank you for joining us to review our first quarter fiscal 2010 results. With me today is David Edelman, our Chief Financial Officer. I'm pleased to report another strong quarter of operating improvements.

EPS was up compared to first quarter 2009 and first quarter 2008. Our gross margin increased sharply from last year and we realized significant expense leverage from our streamlining initiatives. We further reduced inventory and expenses in the quarter resulting in increased cash.

Perhaps most important, we have returned to growing our topline sales with increased in retail, wholesale and licensing. In fact, this is the first time in nearly five years that we have experienced growth in each of our business segments simultaneously.

This solid performance across the board enabled us to exceed our original expectations. Here are a few highlights from the quarter.

Net revenues in the first quarter grew 6% to $110 million. Excluding businesses exited in 2009, our revenues were up over 9%. Gross profit margin increased nearly 800 basis points to 41.6% of revenue with gross margin dollars up over $10 million versus last year.

SG&A expenses improved more than 500 basis points to 40.7% of revenue with expenses down roughly $3 million versus last year. Earnings per share were $0.10 during the first quarter compared to a loss of $0.46 in the prior year's period.

Our balance sheet also remains strong. Inventory was $35 million, down 20% versus the prior year's level. Our continued focus on inventory management was one of the key drivers of our outstanding margin performance.

Cash at the end of the quarter was $66 million, up $20 million versus last year and we continue to operate with no long-term debt.

Our financial performance reflects the improvements we have made to merchandise assortments, the enhanced price value of our products, ongoing inventory and expense management and an improving retail climate. We are beginning to unlock our brand potential and feel increasingly confident about our near-term opportunity to improve both our wholesale and consumer direct businesses.

In our wholesale business we're seeing an upward trend in our footwear lines with better [inaudible] retail resulting in better margins. Wholesale growth was approximately 7% in the first quarter, excluding the businesses we exited over the course of the past year. We expect continued improvements in our wholesale business based on double-digit increases in EDI deliveries and backlog.

While we have some easy comparisons against last year because of retailer destocking at that time, these are still very good trends.

We continue to move forward con some key wholesale initiatives. During the quarter we launched our 925 women's footwear line with unique patented comfort technology into key doors at Nordstrom. Initial sell through results are strong.

Additional doors will be added at Nordstrom this fall and we also expect to add a few top quality accounts. Kenneth continues to lead and drive this important initiative to recapture our footwear leadership.

Our reaction footwear business for men and women also saw healthy growth during the quarter. Turning to men's sportswear, remember, this is both a wholesale business and an important piece of our consumer direct assortment and men's sportswear continues to gain tractions.

Our initiative to create an exclusive reaction men's sportswear collection for Macy's is proceeding very well. This will be incremental business for us and we are excited to see the launch plan expanded to 200 doors from the original plan of 150 doors.

The sample product looks spectacular. It has broad commercial appeal. It is brand right and it will deliver great price value to consumers at attractive margins. We are now in the process of developing our marketing programs and in-store visual presentations.

Every door will receive special signage and fixtures and will have full reaction in-store shops installed in key doors. We expect product to hit the retail shelves in plenty of time for holiday.

Our consumer direct business also improved during the quarter with sales up 13% in total. Comps were up 6% with the balance of the increase coming from new stores and a double-digit increase in e-commerce.

It's important to note that we made a conscious decision not to anniversary the heavy promotions from last year. This held our comps to a relatively modest level of increase relative to last year's volume. We focused instead on full price selling and gross margin dollars.

The resulting increase in our retail gross profits was the single largest contributor to our improved earnings this quarter. In addition, the reduction in promotional cadence was a great benefit to our brand.

We attribute our improved performance to much better products and more balanced inventories. Kenneth and I are working closely together to refine the merchandise assortment, offer more seasonless products and create head-to-toe looks and work-to-weekend fashions. This focus is paying off as we can see from improved sell-throughs and unit velocity.

All major categories are up in our full-price stores with particular strength in men's and women's apparel, footwear and handbags. We are very focused on returning our consumer direct business to profitability and we are seeing progress on a rolling 12-month basis both as a result of selective store closures and performance improvement in the balance of the chain.

We will continue to emphasize conversion, customer data capture, e-commerce growth and targeted inventory management to improve our retail results further. Finally, our licensing business performed well in the quarter, another indication of the strength of the brand.

Over 80% of our licensees reported sales increases in the first quarter versus last year. Standout performers were in the categories of tailored clothing, dress shirts, belts, jewelry, outerwear and women's sportswear.

I'm also pleased to say that we've recently renewed our licenses for dress shirts, neckwear, sun glasses and optical. In summary, we are gaining traction across categories, genders and distribution channels.

We believe this momentum demonstrates both a power and potential of the Kenneth Cole brand. I'd now like to turn the call over to David Edelman, our Chief Financial Officer, to go through the numbers in greater detail and provide our view of the second quarter.

David Edelman

Thank you, Jill. Good morning, everyone. As Jill mentioned, our business was stronger than expected during the quarter. On a GAAP basis, earnings per share improved $0.56 to a profit of $0.10 per share compared to a loss of $0.46 per share last year.

In the first quarter, net revenues increased 5.9% to $109.5 million versus the year-ago level of $103.4 million. This was driven by growth in all three of our operating segments.

Wholesale sales in the quarter increased by 1.3% to $62.4 million; however, excluding exited businesses in 2009, wholesale sales in the quarter were up 6.8%. Consumer direct sales in the quarter increased 13% to $37 million compared to $32.7 million in the first quarter of last year.

This performance was driven by a comp store increase of 5.6%, double-digit growth in e-commerce and the 15 net new stores opened since the end of the first quarter last year. I'll note that we closed three stores since the beginning of the year and expect to close a total of five to 10 stores by year-end.

Licensing revenue increased by 12.4% during the first quarter driven by strength in several categories as Jill just described.

Gross margin rose 770 basis points to 41.6% versus 33.9% last year. This is our highest Q1 gross margin rate since 2006. Gross margin in the first quarter reflects improvements in both wholesale and consumer direct with a significant increase in our full-price stores driven by fresh assortments, trend-right products, sharp price value offerings and the careful control we've kept on inventories.

In wholesale, we are seeing better sale-through rates and lower markdowns resulting in higher maintained gross margins. In terms of SG&A, we've maintained our focus on expense management.

SG&A expense in the first quarter was down $3.1 million to $44.6 million from $47.7 million in the prior year's first quarter. We have reduced our core expenses by approximately $5.5 million, partially offset by the cost of operating 15 net new stores as well as accruing for pay-for-performance annual incentive compensation as we return to profitability. SG&A as a percentage of revenue decreased 540 basis points to 40.7% from 46.1% a year ago.

Pre-tax income in the first quarter grew by $14.7 million to $1.9 million versus a pre-tax loss of $12.8 million last year. Net income grew by $10 million to a profit of $1.8 million or $0.10 per share versus a year ago loss of $8.2 million or $0.46 per share.

I'll note that there were two unusual factors that affected our earnings in this year's first quarter. First, there was minimal tax expense due to the reversal of a portion of the company's deferred tax valuation allowance.

Second, we booked a gain on the sale of marketable equity securities that contributed $0.05 to our reported earnings. Finally, you should keep in mind that last year's $0.46 loss there was $0.05 related to restructuring and other unusual charges.

Turning to the balance sheet, cash at the end of the first quarter was $66.3 million versus $46.3 million last year. We are pleased with our cash flow results which continue to demonstrate management's financial and operational discipline. Our credit facility remains undrawn and we continue to operate with no long-term debt.

Inventory at the end of the quarter was $35.2 million, a reduction of just over 20% versus the prior year's level of $44.1 million and compared with our sales increase of 5.9%. We have improved our inventory turns, have eliminated some working capital requirements by improving our speed to market. Our inventory on hand is current and we believe the levels are appropriate for our business plan.

Looking ahead as our business continues to grow we see some opportunity to drive sales through careful expansion of our inventory investment in selected categories.

With respect to guidance for the second quarter we project consolidated revenues to increase between 7% and 10% and we expect to see continued improvement in both gross margin and SG&A rates as a percent of revenues versus the prior year. EPS is forecasted to be break even to a profit of $0.03 compared to a loss of $0.18 last year.

With respect to the back half, while we are not providing specific guidance at this time, I'd like to remind you to consider a few things. First, we have more difficult anniversaries beginning in the third quarter, both for consumer direct sales and, more significantly, our expense reduction plan.

Also, beginning in the third quarter we will no longer be receiving licensee royalties [for the key rate] from JC Penny. Finally, more broadly, while the retail environment is improving and our conversion is up, our traffic continues to be down versus last year and the back half is more dependent on consumer direct performance. Therefore, we are planning the business prudently.

Thank you and I'll now turn the call back over to Jill for some closing comments.

Jill Granoff

Thanks again for your attention today and thank you, David. We are pleased with the results for the first quarter. We beat our expectations and delivered EPS ahead of 2009 and 2008. Our margins are the best they've been since the first quarter of 2006 and we haven't seen broad-based growth across business segments, categories and gender like this in a very long time.

Our operational streamlining has been effective. We are lean and we intend to stay that way. We will also continue to exercise discipline with regard to our inventory and cash management to keep our balance sheet healthy.

While there is still a lot of work to do to deliver the kind of consistent returns we think are appropriate for our company, we view this quarter as additional validation that our strategy is working.

Looking ahead, we will continue to focus on our six strategic initiatives. One, we will create compelling products with a particular focus on footwear and apparel. Two, we will energize the brand with impactful marketing, merchandising and public relations initiatives.

Three, we will accelerate our retail improvement by driving productivity, closing selected stores and growing e-commerce. Four, we will continue to evolve our wholesale model, collaborating with our partners to build differentiated and targeted assortments.

Five, we will continue to expand our international footprint. Six, perhaps most importantly, we will build a customer-focused performance driven culture with best-in-class talent. We believe the business is on the right path and are committed to exploring all avenues to deliver increased value to our shareholders in the fall season and beyond.

I'd like to thank you all for you attention and support and we're now ready to answer questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Jeff Van Sinderen - B. Riley.

Jeff Van Sinderen - B. Riley

I guess my first question is in the guidance you're providing for Q2, what assumptions are in that for gross margin on operating income and tax rate?

David Edelman

I guess assumption in the two Q guidance is for comp store increases in the mid-single digits with 7% to 10% total revenue improvement. Gross margin improvement of a couple hundred basis points, 150 to 200 basis points; SG&A we think total gross dollars will start creeping up as some of our operating expenses are anniversaried against reductions from prior years.

But our SG&A rate will be down several hundred basis points or a few hundred basis point [spree]. I guess our CapEx assumptions are about $2.5 million. Our tax rate for federal tax rate is going to be zero.

It's a technical answer but when we wrote off our tax assets last year we're reversing them as we earn income. So for the balance of 2010 our federal rate will be zero. We will have some state, local and foreign taxes and we're assuming about $100,000 to $200,000 a quarter.

Jeff Van Sinderen - B. Riley

Then maybe you can talk a little more about the segments that are driving your increased backlog and how much backlog is trending up.

Jill Granoff

Basically, footwear obviously is the largest portion of our backlog and at the end of the first quarter our backlog was up about 16%, 17% and we are seeing continued improvement into the second half of the year.

We're seeing particular strength in both reaction mens and ladies shoes, especial reaction mens which is experiencing a halo affect from the upcoming launch of our reaction mens exclusive sportswear collection at Macy's. So that's driving the increase. It's a small portion so far of the sportswear initiative but most of that will come in the third and fourth quarters.

Jeff Van Sinderen - B. Riley

I know you spoke a little bit about the improvement in your retail store business. I wonder if you can sort of bifurcate or break down what the differences were in terms of operating metrics at your retail stores between full price retail and outlet, if you can just give us a little more color on that.

Jill Granoff

Well, Jeff, you know that we don't break down our metrics between our full-price stores and our outlet stores but what I would say is that both channels had nice comp increases during the first quarter. We're seeing increases in unit velocity.

We're also seeing increases in conversion and we are very encouraged by both of those things because obviously the customers are voting and they're saying that they really see improvements in the product. So we're just seeing traction in both of those sectors.

Jeff Van Sinderen - B. Riley

So conversion is up but traffic is down. Is that correct?

Jill Granoff

That is correct.

Jeff Van Sinderen - B. Riley

Then can you give us the status on the Rockefeller store or maybe you're in discussions and don't want to talk about that?

Jill Granoff

Well, we knew that somebody would ask the question. As we mentioned last time we are partnering with Tishman to find a new tenant for the store. There are a couple of perspective tenants that are interested in taking over the space and once a letter of intent is signed we will be happy to share more details with you.

Jeff Van Sinderen - B. Riley

Maybe you can just touch quickly on some of the things you're focusing on to growth the international business.

Jill Granoff

Sure, well, as you may know we launched Turkey in the first quarter. We opened up two new stores and we'll be opening some additional stores in that marketplace. We continue to focus on the UK where we have had great traction and we are also looking to grow our business in Canada across both wholesale and retail.

We are in discussions for a partnership in India and I'm actually heading off to China in the next couple of weeks. There're a lot of potential partners that are interested in building business with us and once deals are signed we will be happy to, again, share that with you.

Operator

Your next question comes from the line of Scott Krasik - BBT Capital Market.

Scott Krasik - BBT Capital Market

Could you dig into the gross margin a little bit more? Even though you grew in every division it's still a little bit low relative to where it has been historically. Is that just a function of lower initial markups at retail? Are your wholesale margins still lower than where you like them to be?

David Edelman

Actually, we were pretty excited that our Q1 gross margin rate was as high as it's been since 2006, so we are going in the right direction. I think right now where we are is wholesale is a little bit lower than we hoped and some of that is a shift in mix and as we grow the sportswear and footwear business back to our historical rates it'll come up.

Right now some of our private label business and lower end businesses are a bigger piece of the total.

Scott Krasik - BBT Capital Market

Then, Jill, it was just confusing. I thought you said that units and conversion were up but then you said traffic was down. Usually we just use units as a proxy for traffic. What's the -- ?

Jill Granoff

Well, we're seeing some increase in our units per transaction.

Scott Krasik - BBT Capital Market

UPT was up.

Jill Granoff

Right, so UPT is up. The other thing I would say, Scott, just going back to the comment is a big part of the increase is certainly driven at the retail level through reduction and markdowns.

We've really focused on very disciplined inventory management having the right product in the right stores at the right time with the right levels of depth and by doing that we have been able to significantly reduce our markdowns which have resulted in improved margins.

IMUs are up slightly but the biggest impact is really coming from the reduced promotional cadence.

Scott Krasik - BBT Capital Market

Are you planning - I assume then the offset is probably lower, initial prices are lower full price, selling prices.

Jill Granoff

They are but, I mean, I think the key also is we are really planning our development to the out-the-door pricing and that is helping us with our margins overall.

Scott Krasik - BBT Capital Market

Just to your comment, David, on earnings power on the back half of the year, this Le Tigre going out was that a planned event?

David Edelman

Yes, we talked. I mean, when we signed the contract we didn't plan it but Jill gave color at the year-end call that the JC Penny business didn't develop the way we wanted it to so it was about $1 million in royalty in each of the first two quarters and that goes away in the back half.

Scott Krasik - BBT Capital Market

Then in terms of the wholesale gross margin in the back half of the year, can that trend back towards 40% or is that still going to be in the low 30s or low to mid 30s?

David Edelman

I think our wholesale margins have upside potential in the back half although there are some rising pressures on the sourcing side with freight and labor and raw material prices coming out of China.

Scott Krasik - BBT Capital Market

What was the store count at the end of the quarter? If you said it I missed it. What're your plans for the rest of the year?

David Edelman

We ended with 110. We actually closed two stores. It was actually on December 31st and we closed on in April, so we have 109 stores today. We're looking to open five to 10 stores throughout the year. We're also looking to close five to 10 unprofitable stores. So we'll probably end somewhere in the ballpark of where we are today.

Operator

Your next question comes from the line Sam Poser - Sterne Agee.

Ken Stumphauzer - Sterne Agee

Just a couple of questions for you specifically on retail, until this call you guys had talked a fair amount about kind of a new store model that you were trying out for the full-price stores and the positive implications it had for productivity per square foot and so forth. I was wondering if that's something you're still looking into and, if so, what a potential cadence would be for the rollout of that and possible CapEx implications.

Jill Granoff

Sure, but this doesn't sound like Sam.

Ken Stumphauzer - Sterne Agee

It isn't. I'm sorry. I said this is Ken Stumphauzer on the line for Sam. He's out of the office today.

Jill Granoff

In talking about the test stores, what we said was that we were going to run the test stores through the end of last year and what we had seen in those stores is roughly a 20 percentage point improvement in comps as well as a four to five point improvement in gross margin.

We have taken the learnings from those test stores and we have rolled it out across the fleet, which is part of the reason why we're seeing positive comps and improved margins throughout the balance of the chain.

So a lot of the learning had to do with assortment, the price value relationship of our products, having inventory depth on the sellers and we have applied those learnings, which, again, has driven the improvements in productivity.

Ken Stumphauzer - Sterne Agee

So is that something that accrues over time or is it something you see where the immediate benefit we see doesn't necessarily increase over time?

Jill Granoff

I think it's something that actually will continue to increase over time, particularly on the inventory front as we, in some cases, narrow our assortments but go deeper to ensure that we have the proper sizing and color choices for our customers. So I think there should be continued momentum throughout the balance of this year.

Ken Stumphauzer - Sterne Agee

Then, David, as far as SG&A goes, you cautioned us to look at it more conservatively for the back half and you discussed some of the puts and takes in the quarter. Are there any other investments or any other kind of inflationary pressures that should be in SG&A in the back half that we should be aware of?

David Edelman

No, I think one of the main things is that we had done some headcount reductions in the past and we have now anniversaried all of that. The other thing is we have switched to a complete pay-for-performance culture, so we are now profitable and we're starting to accrue for bonuses for our employees.

Ken Stumphauzer - Sterne Agee

But nothing along the lines of advertising or investment systems? Nothing along those lines?

David Edelman

I think it's pretty consistent. We've put a little bit more into marketing, but nothing that's a game changer.

Ken Stumphauzer - Sterne Agee

Then just from a clarification standpoint, when will you anniversary the exit of those various wholesale businesses?

David Edelman

We wound them down over the first nine months of the year, so they'll be completely out of our numbers by September 30th.

Ken Stumphauzer - Sterne Agee

Then, finally, just if you could talk a little bit more about the 925 performance in Nordstrom during the quarter. You had alluded to the fact that there's the potential for expansion in the second half. I was wondering if maybe you could put some parameters around that.

Jill Granoff

Absolutely, 925 launched at Nordstrom in March. It was slate to launch in eight doors. We actually have 12 points of distribution today including the internet. Initial sell-through results have been very good and we are talking to Nordstrom now about additional doors for the fall, possibly doubling the count that we have today.

In addition to that, we are talking to other high-end retailers and department stores about picking up the line. We do think it's important to keep this somewhat exclusive. In addition to wholesale, of course, we will have the product line sold in all of our retail stores and in select international accounts.

Ken Stumphauzer - Sterne Agee

Just to follow up on that, I'd be correct in presuming this wouldn't find its way into the better department store channel.

Jill Granoff

Defined as -- .

Ken Stumphauzer - Sterne Agee

Hillars, Macy's.

Jill Granoff

Right now the plans are really to keep it at Nordstrom and other higher-end department stores.

Operator

Your next question comes from the line of Janet Kloppenburg - JJK Research.

Janet Kloppenburg - JJK Research

Just to say on 925 for a minute, Jill, I got interrupted for a second. I know you said you were going to stay in I think the specialty department stores. You're only in a few Nordstroms. What's the outlook there to increase and would you consider going into Bloomingdales or other high?

Is there some contractual arrangement with Nordstroms where you have to stay with them exclusively for a while? So how many more Nordstroms can we expect? When could it be a full rollout to Nordstroms and contractually are you allowed to move on to other specialty department stores, high-end department stores?

Jill Granoff

Sure, so just to clarify further, we do not have an exclusive with Nordstrom, so we can distribute this line more broadly. We just launched it exclusively with them in the spring season. We were slated to launch in eight doors. We're actually in 12 doors today.

For the fall season with Nordstrom we're looking at adding another 10 to 12 doors, so that would double the Nordstrom door count and obviously we can go beyond that. But we want to be sure that we do this successfully.

We are in conversation with Bloomingdales, Von Maur, Sachs, other accounts, that are interested in picking up the line, so we are working through that as we speak.

Janet Kloppenburg - JJK Research

But that's maybe something that we look out to fiscal '11 for. It probably won't happen this year.

Jill Granoff

There will be growth in the fall season through additional Nordstrom distribution and a few new accounts but we believe that the bulk of the growth will come in 2011.

Janet Kloppenburg - JJK Research

Is that line in your own stores? Is that a best seller right now or can you talk a little bit about what's driving the improvement in the Kenneth Cole stores?

Jill Granoff

Absolutely, what I would say is we launched the line exclusively in our stores. It's doing quite well. We've seen a nice improvement not only in sales but in gross margin rate in our Kenneth Cole New York Women's Footwear.

I think when we look at our best seller's list the 925, the Core Silver Addition style repeated rank among the top 10. We think we have the perfect pump in terms of the pump features and the price value relationship, so that is certainly contributing to the growth in our stores.

The other thing that I would like to point out is that apparel continues to do very, very well, both women's apparel and men's apparel. In women's we are seeing a lot of traction in dresses and in outerwear. In men's, even things like suit separates and dress shirts, just wondering if there's a whole got to look nice to go to work type of trend going on. But we're seeing nice progress in apparel as well as in footwear.

Janet Kloppenburg - JJK Research

Did you say that you don't break out the comps between the outlets and full-price stores?

Jill Granoff

That's correct.

Janet Kloppenburg - JJK Research

Can you talk qualitatively about whether or not you saw progress in the full-price stores and if there - I assume they're still operating at a loss - if the loss was down meaningfully in the quarter?

Jill Granoff

We did see very nice progress in the full-price stores and the loss was down meaningfully in the quarter, driven partially by comp but mostly by the gross margin improvement by having better products, more tailored assortment and better inventory management.

Janet Kloppenburg - JJK Research

Then for the inventory outlook, I know David said that we should start to see it move up. But then should we expect it to be higher? I don't think a lot higher was my sense from your tone, David, but in the next three quarters we should look for it to grow over the prior year?

David Edelman

You know what? We're really pleased with the team and how we attack the inventories and we're going to continue to discipline the approach. So I guess we're just not going to have the wide spread that we have now. So this quarter we were down 20% on the sales plan that was up 6%, so it's just going to get tighter.

We expect that our inventories will either grow slower than our sales rate going forward and our inventory turns will be faster. But the spread is going to come down. It won't be as wide as it is today.

Janet Kloppenburg - JJK Research

Lastly, I know what your comments were on Rock Center, but is there a chance that that transaction can occur this year or is that still to be determined?

Jill Granoff

It's still to be determined but our goal is to have the transaction completed this year.

Operator

Your next question comes from the line of Sam Poser - Sterne Agee.

Ken Stumphauzer - Sterne Agee

As far as the backlog goes, am I correct in that you had said there was a sequential acceleration in the backlog if you look further out?

Jill Granoff

Yes.

Ken Stumphauzer - Sterne Agee

How far out is your backlog locked into? What are the delivery dates that are locked into the backlog right now?

Jill Granoff

Right now we track backlog both through the end of the second quarter and the end of the third quarter. We are seeing continued improvements, as we mentioned, due to the help both of footwear as well as the addition of the reaction men's sportswear.

But I would say we do have some easy comparison versus last year and we know that there was some retailer destocking going on last year. So we look at it every day to really understand the timing of order delivery. But we're seeing nice increases in many product classifications.

Ken Stumphauzer - Sterne Agee

I guess the other question I would have is related to the growth you see in the backlog. How much, if any of that, do you think is reflective of retailers' willingness to accept inventory risk versus maybe more replenishment business last year in the back half?

Jill Granoff

Well, in some cases it has to do with additional doors. So, as I may have mentioned on prior calls, we now have many of our footwear lines in 600 Macy stores where in the past they were in 200 or 300 doors. We have an all-door driver mock program. We're going to have an all-door boot program.

The sell-throughs are doing well so we have reorders. Plus, in addition to that, we have a greater percentage of our business on EDI, so it's a combination of these factors that are driving the backlog improvements.

Ken Stumphauzer - Sterne Agee

One last thing, David, as far as the sourcing cost outlook for the second half, maybe you can talk about the potential increase you'll see in sourcing costs and the possible implications for gross margin. I know relative to inventory cleanliness it's small, but nevertheless.

Dan Edelman

Really quickly, I think that we've brought on some really talented people into our sourcing organization in the last four to five months and the changes that they're making and the efficiencies that we're going to start realizing are probably going to pretty much offset the increases. What we're planning for, at least in terms of forecasting now, is flat to even slightly up IMUs.

Operator

At this time I’m showing you have no further questions. I'd like to now turn the call back over to management for closing remarks.

Jill Granoff

Thank you. Kenneth and I sincerely appreciate the hard work and continued dedication of our employees. I just want to repeat, they are the foundation of our business. We also want to thank our customers for their loyalty and our shareholders for their ongoing support. Thank you, again, and have a great day.

Operator

Ladies and gentlemen, thank you for your participation in today's conference call. You may now disconnect. Have a wonderful day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Kenneth Cole Productions, Inc. Q1 2010 Earnings Call Transcript
This Transcript
All Transcripts