Perry Ellis International's CEO Discusses F4Q 2014 Results - Earnings Call Transcript

| About: Perry Ellis (PERY)

Perry Ellis International, Inc. (NASDAQ:PERY)

F4Q 2014 Earnings Conference Call

April 3, 2014 9:00 AM ET


George Feldenkreis – Chairman, Chief Executive Officer

Oscar Feldenkreis – President, Chief Operating Officer

Anita Britt – Chief Financial Officer


Eric Beder – Brean Capital

Luke Whorton – Keybanc Capital

David Weiner – Deutsche Bank

Mike Richardson – Sidoti


Good morning ladies and gentlemen and welcome to the Perry Ellis International Fiscal Year 2014 Fourth Quarter and Year-End Results conference call. Before we begin, I would like to remind you that some of the comments made on the call either as part of a prepared remark or in response to your questions may contain forward-looking statements that are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Such information is subject to risks and uncertainties as described in the press release and in documents that are filed with the SEC. Today’s call is being recorded.

Joining us today for the call from Perry Ellis are George Feldenkreis, Chairman and Chief Executive Officer; Oscar Feldenkreis, Vice Chairman, President and Chief Operating Officer; and Anita Britt, Chief Financial Officer.

I would now like to turn the call over to George Feldenkreis. Please go ahead, sir.

George Feldenkreis

Thank you. Good morning and thank you all for joining us. I would like to address the factors which tempered our growth and profitability for the fourth quarter and for the full year and contributed to our disappointing results. Afterwards, Oscar and I will reflect on some of this year’s many accomplishments as well as our growth drivers for the future and initiatives we are currently undertaking to pave the road for a stronger Perry Ellis International that will deliver improved profitability to our shareholders.

We ended off the fourth quarter with a 16% decrease in revenues compared to last year and concluded the year with a 6% decrease in total revenue. First, we must address the macro issue at large, which is the revenue decline attributed to the reduction of our private label and exclusive direct to retail brands. Oscar will quantify the decline during this presentation, but it is important to note that in fiscal 2013, these programs accounted for 22% of our company’s total revenue. Today, the same programs account for 18% of total revenue, and by the end of the year we project they will account for 16% of total revenues. Much of those brands exited this year will be substituted by branded products.

This has been a systematic and challenging erosion, one which cannot be replaced immediately; however, our global branded portfolio grew for the year and we are encouraged by this trend, and we will continue to build our branded revenues, which is a more compelling and profitable long-term business model. In addition, because of the competitive holiday season, our retail customers focused their spending on highly promotional key items rather than full price replenishment programs. As you all know, when retailer sales slow down, it triggers a reduction or a complete exit of replenishment programs altogether, figuring that if a customer is looking for a Perry Ellis pant in 34/32 black and they don’t have it in stock, the customer will buy another brand. Specifically, we attribute a significant portion of the revenue decline for the fourth quarter due to replenishment shortfalls, which unfortunately is lost business.

On the expense side, our SG&A increased by 3% for the full year despite the decrease in revenues. Last November, we started to implement a series of difficult but necessary company-wide changes which Anita will detail later in the call. We have also engaged (indiscernible) to assist in reviewing our current system and operating methodologies. While we consider our information technology systems to be first-in-class, we felt that we would benefit from a seasoned advisor as we look to streamline operations moving forward.

Finally as we all know, inclement weather further exacerbated challenges in Q4. Inventory plans were not aligned with store closing and sell-throughs were weaker, impacting gross margins. This caused our company to miss sales and resulted in higher inventory. The weather also affected our total direct retail store business which came down 4.8% for the quarter. While still unacceptable, this performance was an improvement from the first half. We changed management of the Perry Store after the first half, and improvements have been very encouraging. More changes are projected for our retail operations as we are determined to invest smartly in our stores and to make a better shopping experience for our customers.

In reference to the impairment of some of our brands, we took a $41 million markdown as determined by our independent auditors and our accountants. I would like to note that even after this impairment, the appraised value of our brand is still substantially higher than the total purchase price we paid for the all the brands we acquired. We are encouraged, however, by the performance of our ecommerce business which are showing improvement for all our key brands. Our wholesale ecommerce grew by over 20% to $40 million this year. This suggest our consumer is buying our product online at home on their tablets and on their mobiles, and to reflect this transition we have shifted our business structure combine (indiscernible) and wholesale ecommerce team under one leadership, allowing for best practices and improved efficiency with regard to inventory management. Ensuring this (indiscernible) close combination with our retail department will enhance brand consistency and achieve improved clearance and increased AURs, both on the floor and online. Our total direct ecommerce business grew over 35% for the fourth quarter. We expect this positive momentum to continue.

At this time, I would like to express that we’re very pleased by the addition of our new Board member, Alexandra Wilson, who was the cofounder of online retailer Gilt. Our recruitment of Alexandra is a strong indicator regarding how focused we are as a company on developing our omni-channel strategies that will enable us to better serve our customers and attract new customers as well. Increasing collaboration between our wholesale [partners] [ph] and the .com piece will also enable us to identify new growth opportunities and ways to be more productive.

Over the past fiscal year, we executed 13 new domestic and five new international licensing agreements, and our licensing revenue increased approximately 10% for the full year from $27 million to $29.6 million. In addition, our global licensing partners opened 32 new licensed stores this year, 16 across Latin America and 16 across Asia, which we view as a testament to the local and global strength of our brands. We are aggressively executing on competitive strategies to further build our powerful licensing business and further expanding our brands’ global reach.

Specifically on the international front, we see many positive across the (indiscernible). Our Canadian business grew in the low single digits for the year. Our Mexico business grew in the high double digits for the year as we assumed direct control of our swim, golf and ladies brands in the market. We are recruiting additional talent in both Canada and Mexico to increase our business there. We have seen remarkable international expansion for our domestic business and very solid growth opportunities. Our U.K. business grew in the high single digits for the year and approximately 30% in the fourth quarter.

We continue to report solid growth and improved profitability in Europe. We have also started to deliver Callaway Golf in Europe. We have set up the organization to do it successfully and the strength of the brand will allow us to expand to a new customer base.

Our investment will fuel expansion in our own brands in [demanding] [ph] markets. The power and authenticity of our brands combined with generally low market penetration in many countries gives us confidence in our ability to continue to grow in Europe, both in revenue and profitability in the near and long term. Overall, our combined international wholesale, retail and licensed business account for 12% of our total business. We have significantly grown and expand. We’re making important investments in people and platforms in the European Union as well as in Canada and Latin America to spearhead this significant international expansion.

We are encouraged by our early successes in Asia. In Korea, the Perry Ellis brand which is licensed to Hyundai, has exceeded all of our sales expectations in the first year. We are [concluding] [ph] license for the Ben Hogan brand in Korea to a very reputable growth apparel company. Laundry has opened two beautiful stores in the best shopping malls in Beijing with more stores planned in Beijing and Chengdu. Our Manhattan JV partner in China now has nine points of sale, and our Manhattan licensee in Vietnam is currently operating approximately 40 stores. We are very excited about the growth opportunities for our brand in Asia.

So in summary, while I’m not satisfied on our recent results, we should not lose sight of the fact that our adjusted EBITDA for the year was still $35 million and we have the financial resources and cash flow to support our strategic initiative. We will continue to expand geographically and strengthen our national brands at retail. We have a solid portfolio of brands and businesses, and we are committed to enhancing value to all shareholders.

We thank you for your patience, and I will now pass the call over to Oscar.

Oscar Feldenkreis

Good morning all, and thank you for taking the time to join us today. I plan to provide an overview of the key challenges which our company addressed in 2013 and then focus on the extremely exciting initiatives we have planned for our lifestyle brands and for our company’s promised future.

First, I would like to provide more color on our strategic decision to reduce and consolidate our private label and exclusive brands. In fiscal 2014, we commenced or completed exits from 20 of these programs, representing a $62 million decline in revenues. The strategy will continue to unfold in fiscal 2015 as we plan to exit four additional programs, resulting in an additional $20 million in revenue loss. To be clear, these planned 2015 reductions are already reflected in our guidance. Importantly, we excluded the effect of these strategic decisions.

Our owned and licensed brands grew slightly in fiscal 2014. This is a testament to the strength of our branded portfolio and to the wisdom of our decision to concentrate on our branded business. We will continue to direct our energy and capital towards international, multi-retailer lifestyle brands across our core platforms which consist of men’s sportswear, bulk lifestyle apparel, and women’s sportswear. To facilitate this transformation, we have aligned our teams to create a new business structure that will focus on the brand lifestyle across all product classifications.

George outlined some of those special challenges all of us encountered in Q4 related to the weather. There is very little you can do when you are faced with store closings, and it is hard to make that up when the customer is unable to shop and see the value of our product offering. However, for our climate zones which have experienced favorable weather, spring readings have been quite positive across our entire portfolio. This gives us the strength and strong conviction that performance will strengthen as weather in the remaining regions normalizes. The Easter shift also will benefit spring sales; however as Anita will confirm, since Easter falls nearly three full weeks later in 2014, we planned Q1 conservatively to address this calendar shift.

Now I will address the business specific performance at retail. For Perry Ellis, we are laser-focused on the profitability at the door level. In fiscal 2014, we installed our new Perry Ellis Shop in 13 doors at key retail flagship locations, as well as reinstated our incentive selling specialist programs. Based on strong results, we are planning to install an additional 75 shops throughout fiscal 2015. This collaboration has enabled us to secure prime floor space at retail and provide additional customer service focused on the Perry Ellis brand. We believe that expanding this strategy will further benefit our brand and drive profitable sales in top locations around the country. Original Penguin, we will continue a targeted focus on the millennial consumer, inspired by the brand’s Be Original positioning.

Our business at wholesale continues to strengthen. In 2013, we grew 13% for the full year. In Q4, we grew 25% and we are on track to achieve over 20% growth for fiscal 2015. Our efforts to position the brand as a full lifestyle collection with key partners instead of separate classification businesses is working. Specifically at Nordstrom’s, we are now in all doors this year and online, and have been selected for the retailer’s first Canadian store. We’re also installing 10 more shops at the Lord & Taylor this year, bringing the total to 14, and we are very excited for the rollout.

At retail, we also launched our New York flagship store on Broadway in the NoHo area. Our stores serve as a vehicle to offer the most comprehensive brand experience, showcasing the full product range and creative. Finally, we will be rolling out additional products, fresh marketing campaigns over the next few months. We have partnered with one of the world’s leading consumer brands to develop a co-branded apparel collection in connection with the World Cup event this summer, and it is very exciting. We have already secured exciting new retail accounts in Europe, and details of that project will be announced the week of May 19.

Our Savane brand, which until this past year was focused primarily in the bottoms classification business, recorded a 20% growth this year, reflecting the brand’s outstanding product value offering. As of 2014, we are in over 1,200 doors across the country, including at all Belk and BonTon doors. We’ve positioned Savane as a premier national brand in the department store channel by rolling out a full lifestyle collection, including suits, sport coats, sweaters, shirts, and accessories. Savane appeals to a consumer who favors performance, comfort and innovation, which are the cornerstones of the brand. We will be introducing differentiated product to multiple accounts across the country and believe Savane will grow in the low double digits next year.

PEI has become the industry’s dominant golf apparel vendor with our portfolio of national and international brands, led by Callaway, PGA Tour, Ben Hogan, Grand Slam, and our most recent addition, Jack Nicklaus. In total, our golf brand business grew in the mid single digits for the fiscal 2014 year. After adjusting for our exclusive brands, our golf business achieved an organic growth of plus-13% and a total growth of plus-18% compared to last year.

We are extremely pleased by the initial launch of our Jack Nicklaus brand that was shipped in Q4 and hit the floor in February. We’ve built an outstanding team to execute this initiative and we believe that the consumer will respond extremely well to the fashion and value associated with this iconic brand. Our cooperation with Jack personally is great. He is positively contributing to our commercial success.

Going forward, we view the following to be our key growth drivers. First, we would lead with our pipeline of game-changing products which are stronger than ever. We are rolling out new initiatives and innovations, including Outlast technology that provides maximum sun protection, and new fabrications to increase the range of motion. Each design enhances to develop to ensure our golf enthusiasts achieve maximum game performance.

Second, we will capture market share through account and door growth, both domestically and internationally. For example, in Ben Hogan we are represented in over 4,200 Wal-Mart doors, up from 2,000 one year ago and from zero when we first acquired the brand two years ago. For Callaway, while we introduced the brand in the department store channel, we have since expanded the brand’s apparel distribution into sporting goods, corporate ASI, big box and on- and off-course specialty accounts. This year, we launched As George discussed, we have invested in our European team’ infrastructure to further propel our Callaway growth. The PGA Tour continues to build a formidable fan base worldwide and over 830 million households worldwide watch the PGA Tour on television. Perry Ellis International has been front and center with the organization’s global expansion, and we are now distributing apparel across Canada and Latin America.

Third, our marketing is compelling and driven by the rosters of PEI golf brand ambassadors who have accounted for numerous wins worldwide, such as our PGA Tour ambassador Jason Dufner who won the 2013 PGA Championship. Our team’s intimate knowledge for the golf landscape has allowed us to make strategic partnerships with all of our ambassadors, which have generated stellar returns for each brand.

Fourth, we will continue to expand our golf product offering. For fiscal 2014, we broadened our golf lines with the launch of women’s golf apparel collection. For fiscal ’15, our Ben Hogan signature collection is leading efforts on this front. This spring, we launch a series of new product categories, including golf balls, golf gloves, hats, visors, belts, towels and umbrellas. Reception at retailers thus far has been exceptional. In addition, we recently hired a talented design leadership for our golf division’s gift and accessory business in order to expand on this product group’s Q4 success at retail and to ensure our company’s long term position as a proven leader in the accessory business.

Turning to women’s sportswear, this was a year of turnaround and product extension, paving the way for a solid future driven by organic revenue growth. For Rafaella specifically, the brand realized a significant improvement in its profitability for fiscal 2014. First, we have been exiting the brand’s lower margin private label programs in order to shift focus onto the core Rafaella brand. As a result, our team has been able to create better assortments, strengthen our profitable replenishment categories of our business, and refine pricing and promotional strategies at retail. Second, we are broadening our apparel offering and introduced the Rafaella sport capsule this quarter. Current selling has been very strong on key items such as curvy denim, which will extend the lifestyle brands by delivering product in new styling and fabrics. We have also signed a license agreement that will expand Rafaella into handbags, belts, small leather goods, hats, scarves, and cold weather accessories beginning holiday 2014.

Finally, we have exciting new fixture programs for Rafaella. Next week will be the launch of the first Rafaella shop at Belk’s Dallas flagship store. Our installation looks incredible and we believe this will drive improved margins and turns for both ourselves and our retail partners. We will continue to assess our fixture shops investments and believe that there is potential to install up to 70 shops for the next 18 to 24 months. With Rafaella’s profitability structure expanding, we can direct our attention to revenue while our growth expectations are modest for this year with sales increase in the low single digits. We do believe there are many opportunities as the brand continues to perform and capture increased market share.

Our leading contemporary brand, Laundry, had a solid fourth quarter despite a difficult dress zone environment. Our evening business was strong and gowns continued to be strong, steady business. Laundry continues to partner with the top names in retailers from Neiman Marcus to Sacks and Nordstroms to Bloomingdales to Lord & Taylor. For fall 2014, we launched two separate programs at retail and expanded our assortment of opening price point dresses at Belk’s, BonTon and the Bay in Canada. This will allow us to broaden the brand reach in a disciplined expansion plan. Our licensed revenues for Laundry increased over 30% this year, and we have signed a new leg wear license agreement which will hit the stores holiday 2014.

In the coming weeks, we will be announcing new licenses for the brand as we expand into tech accessories and move deeper into the home market. This initiative will complement our existing licensed products, an area where we expect to pursue profitable growth.

Finally, our Nike swim business has its best year ever. During the year, we increased sales, ecommerce, sporting goods channel. Major department stores and across all product categories in men’s, women’s and kids and accessories. For fiscal 2015, we are projected to grow double digits across these distribution channels and we are encouraged by the strong bookings for this season. In addition, we will be expanding our swim gear accessory assortment and rolling out fixtures at the top five sporting good retailers key doors this year.

In conclusion, we have built a successful diversified business model with powerful brands, a broad channel mix, and an expanded geographic range designed not only to mitigate risk but also to realize the promise of our many growth opportunities. Not all of these opportunities are organic. For Ben Hogan, we acquired a brand with no distribution and have developed the trademark into a two-tiered global lifestyle brand with distribution in over 4,200 doors and new licensing partners, including Hard Goods Clubs domestically and internationally. For Laundry, we acquired a brand which had a negative 30% operating margin, and since our management we have quadrupled sales, built a portfolio of outstanding licensing partners, and now the brand is one of the most profitable within our portfolio. Our turnaround with Rafaella is well underway and we anticipate further rewards and benefits.

Moving forward, to complement organic growth we will not hesitate to deploy our capital and balance sheet again to acquire other brand or platforms, which we can create value for our shareholders, our growing revenues and improving profitability.

I will turn the call over to Anita Britt. Thank you very much.

Anita Britt

Thank you Oscar, and good morning everybody. As you heard, this management team is not satisfied with our recent performance. We have taken and are taking a number of decisive action steps to address the challenging and changing environment and to reflect our refined business model.

First as Oscar noted, we have narrowed our focus on key brands by major distribution channel. This will allow us to leverage the brand across design, sourcing and marketing. Second, we initiated an infrastructure rationalization that began in November. To date, we have identified $9 million in cost of goods and SG&A savings that will be recognized in fiscal 2015. I will provide more detail on that shortly. Third, as George mentioned, we have engaged a global strategic consulting firm to support our efforts in continuing review of our business and processes. We will be providing more detail on this review as we move throughout the year. The goal is to streamline our operations and business platforms, enabling us to be more focused on the businesses that will drive our go-forward profitability. While we believe that many of our platforms and competencies are solid, we are exposing all areas to this review.

We have previously discussed our results for the quarter and the year and the issues that impacted our performance. In addition, we have recognized a write-down of $42.9 million of certain intangible assets, principally trademarks, goodwill and certain store leaseholds principally resulting from our internal review of non-core brands and businesses. We view this as a very positive step as we streamline our business model and put our muscle and our money against our power brands.

Turning to our segments, I’ll provide the final annual results. Our men’s, sportswear and swim segments recorded revenues of $664.8 million as compared to $708.2 million in the prior year. Within the segment, we realized a 13% increase in golf apparel revenues inclusive of Callaway, PGA Tour, and Ben Hogan, which were partially offset by reductions in Grand Slam as well as the planned in Top Flite. Our largest decline in this segment was recorded in the mid tier with private and proprietary brands that were down over 20% as this channel experienced more softness and retailers worked aggressively to manage inventory levels. Finally, as previously discussed, we experienced a pullback in replenishment flow through the fourth quarter across most businesses.

Our women’s sportswear segment recorded revenues of $136 million as compared to $149 million in the prior year. Overall replenishment levels impacted our original Rafaella business plan. On the margin side, we executed well with product performance resulting in substantially stronger gross margins for the year. In our direct-to-consumer segment, revenue totaled $81.8 million for the year as compared to $85.2 million for the prior year. On a positive front, we saw ecommerce strengthen in the second half of the year, providing a 30% increase for the half. We were disappointed by our retail store performance for the year, which registered a 5.5% same store decline. Finally, licensing income registered 11.6% increase to $29.7 million versus $27 million for the prior year, and this was driven by the strength of our Perry Ellis, Original Penguin, and Laundry brands.

Moving on to gross margins, we saw margins expand to 34.3% for the fourth quarter from 32.6% for the year-ago period. The increase was driven by product performance in our collection businesses as well as greater contribution from our golf lifestyle apparel, international and licensing.

Turning to our balance sheet, our net debt position totaled $154 million at the end of the year, reflecting a net debt to total capitalization of approximately 29.2%, a very comfortable level that provides us the resources and flexibility to operate our business and support our strategic planned investments. Receivables totaled $146 million, a 16% decrease over prior year, in line with our fourth quarter sales decline. Our aging is extremely strong and the overall health of our retailers is very solid.

Inventories totaled $207 million at year-end as compared to $183 million at prior year end. We continue to see very current goods, our aging is in sold shape. The higher level of inventory from plan resulted from the reduced replenishment in the fourth quarter. Our planning teams are reducing future buys, and we will utilize the inventory for first half fulfillment. Inventory discipline and management continues to be a key focus for us by business as we look to drive greater efficiencies.

As we view fiscal 2015, the industry has started out with a relatively challenging start, continued weather and channel softness. The month of March faces the shift created by an early Easter and Passover in 2013, which falls in April of this current fiscal year. We began to see a more interested consumer who put their toe in the water in mid-February, and most retailers anticipate the weather warming in spring will release some pent-up demand in purchases in the future. With that backdrop, we have planned our revenues in a range of $910 million to $920 million, essentially even with fiscal 2014.

By business, we see men’s sportswear and swim segment even, reflecting an increase in growth in golf with Callaway, PGA Tour, Ben Hogan, and the addition of Jack Nicklaus. We also anticipate growth in Nike swim across team dealers as well as department and sporting goods stores, and we expect to see a 20% increase in our OPG wholesale business, as you heard Oscar speak to our growth in department stores. Offsetting that, we have planned the replenishment portion of our businesses down to be conservative, as well as we will feel the impact of the final private label and exclusive label brand exits from prior year, as well as some additional exits that Oscar spoke to this year.

In women’s sportswear, we are forecasting even to prior year. We do anticipate growth in Rafaella based on solid performance in 2014, as well as the addition of the sport and denim offerings that Oscar spoke to; but we are planning replenishment down with a conservative stance as well as an exit of a private label program that carries a lower margin.

Direct-to-consumer is planned up 2% to 3% in retail same store sales, and inclusive of our ecommerce lift we should see that overall comp store segment be up 5% for the year. We have planned five new store openings this year and will offset that with the closing of a handful of stores. The goal of retail is to reverse the negative slide from fiscal ’14 as well as build on the profitability of new locations that we have opened as they mature. Finally, we see licensing increasing by 3% to 4%, reflecting continued growth in our existing portfolio led by the strength of the Perry Ellis brand, Original Penguin, Laundry, as well as Ben Hogan. Overall, we believe there could be more opportunities in these segments but we want to remain conservative at this stance.

We expect gross margins to expand to a range of 33.7% to 33.8% for the year. This increase is driven by favorable mix within our revenues as well as reduced levels of liquidation in our fashion swim business compared to prior year. We also believe there’s additional opportunity driven by reduced freight costs as well as the consulting review of our supply chain.

Turning to expenses, we have implemented the following under our infrastructure rationalization initiative. By focusing on our power brands, we have streamlined our design effort, reducing the number of styles and increasing final adoption rates for those styles. As a result, we have reduced headcount as well as product sample lines necessary to support our sales teams. We have aligned our businesses by brand to ensure that we are addressing the full product lifestyle opportunity under our key national brands. As a result, we have eliminated redundant positions and are providing for key focal points by business and by brand.

We have tightened up spending on all discretionary items. For example, increasing use of technology for meetings has enabled our teams to use time more efficiently as well as to reduce travel expenditures. We have renegotiated marketing contracts and agreements, directing our spend to the growth brands for our organization. We still do anticipate an increase in our marketing spend over prior year as we invest in new, in our golf businesses under our Europe platform, as well as for our golf businesses under Callaway, Jack Nicklaus and PGA Tour. We have also challenged all of our support infrastructure, eliminating functions or processes that are not deemed value-added. Finally, we renewed our credit facility and mortgages at more favorable rates, thereby reducing interest costs, initiatives that we mentioned that were underway during the last call and we were able to execute during the fourth quarter. As a result of these steps, we have reduced headcount by approximately 6% of workforce and we anticipate still further reductions resulting from the review of businesses and processes that we are undertaking.

We anticipate depreciation and amortization, as well as interest, in a range of $14 million to $15 million with our tax rate in a range of 31% to 32% for the year and shares slightly reduced to a range of 15 million to 15.2 million, reflecting our share repurchase during fiscal 2014. Adjusted earnings per share excluding costs associated with our realignment will fall in a range of $0.75 to $0.90 for the full year.

Now as we look by quarter, given the shifts in the Q1 calendar based on the change in the holidays as well as the climatic weather challenges that we have seen, we are expecting our first quarter revenues to fall in a range of $230 million to $240 million, and this also reflects the reductions in the private label and exclusive brand reductions as well. We expect earnings per share in a range of $0.25 to $0.30. We do expect revenue and EPS growth from quarters two throughout quarter four for the remainder of the year.

We expect CAPEX to approximate $13 million to $14 million for the year, and our cash flow from operations to be a source of cash of approximately $50 million for the full year. As we look at the balance sheet, we would anticipate even receivables at the revenue guidance I’ve provided and inventories to decline by year-end to a range of $175 million to $185 million as we reduce our replenishment inventory weeks of supply.

With that overview, I’m going to turn the call over to the operator to open it up for questions.

Question-and-Answer Session


Thank you, ma’am. [Operator instructions]

We’ll take our first question from Eric Beder with Brean Capital.

Eric Beder – Brean Capital

Could you talk a little bit—is this—when we look at the private label business, is this kind of the last rung for private label? And going forward when everything kind of normalizes, what should we think about in terms of the growth potential for these businesses – there are a lot of different businesses. I guess the final question is you’ve done a lot of rationalization of the brands. Is there going to be further rationalization of brands as we go forward? Thank you.

Oscar Feldenkreis

In terms of the private label, the rationalization of the private label exits that we will complete by the end of this year, the $20 million should—that should finish once and for all the planned businesses that we have exited. Whatever private label we will stay with are long-term relationships that we do not see any liability in the next 10 years at best, that going forward on those.

In reference to the future and how do we see our business, it’s very simple – today we operate a men’s sportswear division where the team is much more focused on the core brands of those businesses. Our golf business, as I mentioned, will show continuous growth, of course organically, and the introduction of Jack Nicklaus, which we are very excited. The launch at JC Penney has been fantastic and they are interested in growing product categories with the Jack Nicklaus trademark, as well as growing the PGA Tour. We own the golf business in the JC Penney store currently today, and we will be expanding the distribution of the Jack Nicklaus brand going forward.

In terms of our ladies business, as Anita had mentioned, the growth of what we are forecasting for Rafaella and Laundry, as well as the excitement that we have with Original Penguin, which has had two solid years back-to-back, and this year is another solid year led by a new team that we have currently today led by Joe Cook and his team, which have done an incredible job in redirecting how we show the product and how we sell the product in as a full-line collection.

So we’re excited about the future, and that’s why we are—I think the streamlining that we have done is the right thing, and we’ve been hearing it from many of you that you wanted us to get smaller, more focused, and that’s exactly what we did.

Eric Beder – Brean Capital

Great, thank you and good luck to you.

Anita Britt

I would just add too, Eric, the programs that we’re continuing to go forward with, that Oscar spoke to, are the higher margin programs. The focus has been to exit the lower margin businesses as our goal has been to expand gross margin on a go-forward basis.

Eric Beder – Brean Capital

Great, thanks.


(Operator instructions) We’ll take our next question from Edward Yruma with Keybanc Capital.

Luke Whorton – Keybanc Capital

Thanks, good morning guys. It’s Luke Whorton on for Ed. I wanted to go back and kind of revisit the conversation about the core versus non-core. As you’re narrowing your focus on the business and brands, you identified this core particularly in your press release. How do you plan to manage and/or even divest some of these non-core businesses going forward? Is there any level of quantification you can give to the potential impact to top and bottom line?

Oscar Feldenkreis

We’re not planning on divesting. We see ourselves as two different companies, Luke. We have a licensing business, so there are brands that we just basically do wholesale and license. What we’ve done is, for example, you take a brand like Pro Player, which is in our portfolio, but we don’t manufacture any product for it. It’s pure—it’s a pure licensing business brand, so we don’t seem to—what we’re trying to do is the brands that we do not see validity for a wholesale business, we will exit the wholesale business but keep the licensing income, which is very formidable, and run the business that way and the trademark.

Luke Whorton – Keybanc Capital

Great, thanks. And then just real quick, Anita, I think for you is to look at inventory levels. You gave a little color on—I think a significant chunk of that is a result of the decline in the replenishment business. Any more color there, or are there any other pockets of excess inventory that give you a little concern, and how do you plan to manage through that? Thank you.

Anita Britt

Yes, honestly the inventory at year-end and the slightly higher level was really driven by the higher replenishments. So when you look to the overall levels, what we’ve done, as I mentioned, internally is really as a team pulled back on the go-forward buy plan, so that is good go-forward inventory. In terms of our guidance for any liquidation of off-price that we have planned for the year, that’s incorporated into our go-forward guidance, so we would not see any further degradation beyond the margin guidance I’ve provided.

Luke Whorton – Keybanc Capital

Great. Thanks so much, guys.


We’ll take our next question from David Weiner with Deutsche Bank.

David Weiner – Deutsche Bank

Thanks. Good morning everyone. So I had two questions. So the first – I was wondering if you could comment a little bit on your brick and mortar strategy going forward. You gave some color about the gains you’re seeing on the Internet side, on the digital side; but I guess maybe a little more color if beyond kind of the weather and the macro, if there are any strategic changes you have to make in your brick and mortar strategy. And then second question was maybe a quick update on sourcing. I take it that you’re probably not seeing any outsized trends there, given you didn’t mention it; but just thought I’d ask if you could comment on that. Thanks.

Oscar Feldenkreis

I’m going to let my father talk about the direct to—the sourcing side.

George Feldenkreis

Well I’m in Hong Kong right now, I was yesterday in Vietnam and I’m going to Shanghai tomorrow. Currently any sourcing changes, basically cotton price is relatively within the band that it had been during the last few years; polyester prices which are now very much involved. As you all know, most of our golf business today is polyester. (Indiscernible) is stable. Today China produces 70% of the polyester of the world, so those are the—those prices are stable too. We don’t see any changes as to price increases. There might be some price decreases because a lot of factories don’t have enough business. The bookings for the first six months of the year are very weak, and a lot of manufacturers—actually manufacturers are really asking for orders because there are not enough orders in Asia right now. So from that standpoint, it could be an improvement on our custom situation.

The only thing in the future that there might be an approval if Congress ever gets [work done ][ph] on the administration of the trans-Pacific agreement, trade agreement, which would change a little bit the paradigm on how product is sourced because it would be to the benefit of non-China Asia countries. But there is no way this is going to be passed this year – maybe next year, and if it’s not passed in ’15 it will probably be a ’17 project because ’16 again is an election year in the United States and we know how politics affects this. But that’s on the sourcing side. If you need more information, I’d be happy to give it to you.

As far as brick and mortar, we already indicated that our sales of branded products grew last year despite being a year that most people were down on, despite the—and of course we’ve got our business in the private label so we continue to see an expansion of our business and many of our—most of our businesses today are doing better than last year, including Perry Ellis, Rafaella, Laundry, and Penguin, which are the key brands, and Savane we expect to have big growth next year in Savane. Those brands continue to grow, and so I see this coming year, especially towards the second half, as a good year for the company.

David Weiner – Deutsche Bank

Great, thanks for that.


We’ll take our next question from Mike Richardson with Sidoti.

Mike Richardson – Sidoti

Good morning and thanks for taking my questions. Just a couple right here. First, any plans to replace Carmen, and if not, who is going to be heading up Perry Ellis? And then second, if I understood you correctly, you’re planning the Perry Ellis business down again this year, and if that’s the case, I’m wondering what it’s going to take to grow the top line there. Thanks.

Oscar Feldenkreis

As to Carmen, we will not be replacing Carmen at this present stage. We have a very good team that’s managing the organization right now that I feel confident in that team, and that team will be reporting directly to me. In terms of Perry Ellis, the area that we talked about was replenishment, which we are tightening it up and focusing that effort, but we will see growth in the Perry Ellis brand going forward into this year. We spent the last two years with a lot of mistakes in design, deviating from what our DNA was, and the holiday season, which was last year, proved to be very good for us as we were very focused on going back to what our DNA was, which is dressy product. Our business currently today in the stores is very, very strong.

Mike Richardson – Sidoti

Okay, and just one quick one for Anita – I know you guys are planning gross margin up year-over-year, but directionally based on inventory levels, should we be thinking about that down year-over-year in the first quarter.

Anita Britt

No, actually I would expect gross margins to still be up in the first quarter, again driven by mix of the—the overall mix of what—you know, where we’re expecting growth in the first quarter as well as through the year, as well as a slightly lower level of liquidation on the fashion swim side.

Mike Richardson – Sidoti

Okay, thanks. Best of luck, guys.

Anita Britt

Just to elaborate, we expect gross margins to be up every quarter.

Mike Richardson – Sidoti

Okay, thank you Anita.


At this time, there are no further questions. I’d like to turn the call back over to our speakers for any closing remarks.

George Feldenkreis

Well thanks to everyone for your time and attention this morning. If we didn’t get to your questions, and I know it was a complicated call, please call Anita. She would love to have questions from you guys all day long. We have extreme confidence in our company and our business model. We are prepared to face the challenges of the current economic environment, and more importantly we have the (indiscernible) and the flexible platform to go forward. We have an excellent situation with our brands and our offices overseas which are first rate. We are certain we can meet the ever-changing landscape of our retail competition, and with the product mix and our customer relationships, we have all the confidence to power on.

Have a great day, and thank you for your patience.


Ladies and gentlemen, this does conclude today’s conference. We appreciate your participation.

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