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Elizabeth Arden, Inc. (NASDAQ:RDEN)

Q3 2014 Earnings Conference Call

May 12, 2014 4:30 PM ET

Executives

Rachel Schachter – IR

Scott Beattie – Chairman, President and CEO

Kathy Widmer – EVP and Chief Marketing Officer

Joel Ronkin – EVP and General Manager, North America

Rod Little – EVP and CFO

Analysts

Arnie Ursaner – CJS Securities

Bill Chappell – SunTrust Robinson

Joe Lachky – Wells Fargo Securities

Joe Altobello – Oppenheimer

Jason Gere – KeyBanc Capital Markets

Patrick Trucchio – BMO Capital Markets

Linda Bolton Weiser – B. Riley & Associates

Paul Simenauer – JPMorgan

Operator

Greetings, and welcome to the Elizabeth Arden’s Third Quarter 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 Rachel Schachter of ICR.

Rachel Schachter

Good afternoon. Thank you for joining us. Before we begin, I’d 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 very much, and welcome everyone to our Q3 conference call. With me today is Joel Ronkin, our Executive Vice President, our North American business; Kathy Widmer, our Executive Vice President and Chief Marketing Officer; Rod Little, our Executive VP and Chief Financial Officer and Marcey Becker, our Senior Vice President of Finance.

In terms of the agenda today, I would provide an overview of our Q3 and year-to-date fiscal 2014 performance as well as the restructuring activities we have currently undertaken to improve the performance of our business as we look forward to fiscal 2015.

I will then introduce Kathy, who will provide a brand marketing review. Following Kathy, Joel will provide a review of our North American business and finally, I’m pleased to introduce Rod Little, our newly appointed CFO, who will provide background of his experience in perspective on our business and will provide his preliminary roadmap for our business as we look forward to fiscal 2015.

In terms of Q3 performance, it was obviously at this point, and reflected many of the same factors affecting our performance during Q2. The primary weakness in North America similar to Q2 was weakness in our U.S. mass retail based fragrance business.

The reduced store traffic was seeing a weakness in the unprecedented store closings due to harsher winter weather all contributed to continued poor demand and replenished in the fragrance category.

Recall, we are anniversarying significant increase in the fragrance, in our fragrance sales last year at this time due to new launches and acquisitions. In addition, we’re experiencing strong erosion from several fragrance brands, including in Justin Bieber and Taylor Swift fragrances.

The combination of weak overall demand in difficult comparable 2013 quarter was these fragrances contributed to 10% increase from the previous year throughout the North American weakness.

In terms of our international business, our weakness was driven primarily by us, consciously releasing shipments primarily to international distributors in an effort to improve promoting both our fragrance brands and Elizabeth Arden brand.

As we stated in our Q2 conference call, the beauty market particularly in fragrance is experiencing heavy price discounting and promotional activity.

Under Eric Lauzat’s leadership, our Executive VP of International, we would get significantly tightened product distribution and an effort to improve retail pricing and gross margin.

As Rod will discuss in more detail, we’ve also began to execute a turnaround of our business focused on four key principles. First, improving distribution and particularly in our international business to better leverage our brands through the use of strong regional commercial partners.

Secondly, to simplify and streamline our organization to be faster and more efficient, this will require reduction in both direct and indirect overhead to lower our overall cost structure.

Thirdly, a renewed and intense focus on improved gross margins, and finally to improve the pace and effectiveness of our innovation programs. High quality innovation has been a significant driver of gross margin and revenue growth in our past, and it’s critically important to the future of both revenue and gross margin growth.

Our brand portfolio and organization is strong. But over the past years we have not commercially executed the business well. We are aligned with the management team to implement the changes required to improve the commercial execution of our business and return to the consistent improvement in gross margins, EBITDA and return on invested capital we experienced from 2009 through 2013.

In addition to the turnaround plan, management is implementing, the board hired Goldman Sachs to explore potential strategic alternatives to enhance shareholder value and to accelerate the growth and maximize the value of the brand portfolio. We will not provide any further comment until the time is appropriate.

I would now like to introduce Kathy Widmer, to discuss year-to-date brand performance.

Kathy Widmer

Good afternoon. I’ll first speak to the performance of our fragrance business followed by the Elizabeth Arden brand.

Year-to-date performance across our fragrance brand has been negatively impacted by erosion and celebrity license brand, headwinds in the U.S. mass and by competitive pricing pressure in international.

Year-to-date net sales across our fragrance portfolio were down 13% as shipments for most brands were soft compared to last year offset by strong performance in the launch of One Direction’s first fragrance, Our Moment.

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, steeper than anticipated erosion among most celebrity license brands contributed to our shipment’s mass versus budget and versus a year ago.

We are preparing to introduce a full range of new fragrance products for the fall season across several brands including Viva la Juicy Gold Couture, as well as line extensions across our Britney Spears, Justin Bieber and Nicki Minaj brands.

Moving on to the Elizabeth Arden brand, year-to-date net sales across the brand are down 3% driven by 6% decline in fragrance as a launch of Untold was more than offset by softness in the classics Red Door and Fifth Avenue. Some of this softness was the result of deliberate distribution choices made to improve pricing and resulting gross margin over the next several quarters.

Skin care, flat year-to-date compared to last year as the pipelines associated with innovation were smaller in comparison.

Performance across our global flagship Doors were executed the most complete renovation of the brand, continues to outpace market growth. Flagship Doors are up 17% reset to date as compared to up 20% reported through last quarter. This growth is significant as all markets lapsed the one-year anniversary of the reset and continue to post year-on-year growth. We will continue to monitor performance of the global flagship Doors through the next quarter.

We are underway with our plans to launch Arden innovation for the fall season. Three launches are planned for skincare. Ceramide wall feature, a skincare treatment mind focused on addressing the earliest signs of aging and emerging global anti-aging segment is our primary skincare introduction for fall.

Also, in skincare we are launching an extension to the PREVAGE franchise, PREVAGE neck and décolleté serum and repair cream, as well as our seasonal 8-hour cream limited edition.

In Arden fragrance, we are introducing a companion fragrance to our newest pillar Untold, a more intense version called Untold Absolute. And finally, we’re launching several eye products in the beautiful color range.

This concludes the marketing update. I’ll now turn over to Joel.

Joel Ronkin

Thank you, Kathy. I’m going to discuss the performance of our North America business, providing an overview of our net sales performance and retail sales trends. The North America business comprises 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 outlet sales and global eCommerce business.

First, let me comment on our overall performance. Net sales in North America fiscal year-to-date were down 12% compared to last year, and down 23% for the third quarter. As Scott indicated, the primary causes of this decline were first, the anniversarying of last year’s strong brand activity which included an exceptionally robust launch calendar particularly in celebrity and many newly acquired brands and licenses.

By comparison, our innovation has been more modest this year. However, we’ve also experienced later than expected erosion in a few of our key celebrity brands particularly the Bieber and Swift franchises.

Second, the overall retail environment has been weak, including inventory de-stocking in a number of our accounts and historically bad weather. While it’s difficult to quantify many of our retailers that public commented on the impact of the weather on retail sales this past third quarter, and we certainly were not immune.

Third, we made some selective reductions in mass distribution to position our brands for future aggress margin improvement.

Focusing first on prestige, net sales declined 10% fiscal year-to-date and were down 21% for the quarter, driven by lower fragrance sales as fragrance launch volumes were unusually high last year. You may recall that our sales in the prestige channel were up 31% last year in Q3, which included a 78% increase in our department store fragrance business.

Though we’re exceeding our plans so far this fiscal year, our net sales in departments of fragrance business declined 19% year-to-date and we’re down 32% this past Q3. This decline was offset somewhat by a net sales increase of 6% in our Arden counter business year-to-date and flat sales for the quarter.

The direct-to-consumer business continued strong with net sales increasing 23% year-to-date and 31% for the quarter. The beauty category in prestige showed retail sales were declined about 4% for the quarter, after advancing 3.5% in the first half.

The retail sales of the Arden brand are plus 1% year-to-date which approximates category retail trends, those did weaker in Q3. We’re hopeful that better spring weather and a more robust Q4 innovation calendar featuring the launch of While the Future in June will fuel retail sales gains.

Turning now to our mass channel, net sales contracted 13% year-to-date and we’re down 24% for the quarter. The decline in shipment is what related to the same three factors I enumerated earlier.

But we are disappointed in the considerable decline in our shipments in Q3 in the mass channel, our retail sales trends were significantly better. In fact, for the third quarter, retail sales only declined 1% during Q3, after decline of 8% in the first half. While we’re hopeful that we now hit an inflexion point in mass retail sales, it is still too early to be certain.

And with that, I’d like to now turn the call over to our Chief Financial Officer, Rod Little.

Rod Little

Thank you, Joel. Good afternoon everyone. Now before I discuss our quarterly results, I would like to introduce myself and talk about how we move forward to deliver better results.

After 16 years with P&G, I joined the Elizabeth Arden team on April 1, but very much with a running start. As I’m still based in Geneva until this summer, I’ve had the opportunity to gain a broad view of the operations.

I’ve spent a great deal of time with Eric Lauzat, our International General Manager and our teams in both Europe and Asia. Internationally, we need to strengthen our go-to-market capabilities and build a scale in a cost efficient way.

As Scott said, we’re already moving to set up new partnerships and distribution arrangements which will positively impact the business going forward. I’ve also reviewed the global business at the country level as well as the key channels in the U.S.

With 30 days, and there is lot to be done, but I have experienced with lead turnarounds, having been part of the Wella turnaround at Procter & Gamble. This past experience is relevant not only because it’s in the beauty category but also because the business issued in Wella were very similar to what I see here at Arden, including any discussed changed or innovation program, and increase both growth and net operating margins.

We’ve spent approximately $700 million in direct, indirect SG&A and promotional support. And we’re not going to get good return on the investment at the moment, so there is plenty of opportunity.

When I joined Arden, I recognized that we have strong brands and good people. My time at the organization has only reinforced these beliefs. The business results are disappointing but the drivers to improve the business that’s going forward is clear.

As Scott said, there were 4 million priorities our team is focused on to improve our results. First, tightening distribution, this drives a healthy and more profitable business over the mid-to-long term and also a stronger balance sheet and cash flow generation.

Second, improving gross margins, this includes better pricing, better product mix, and reducing discounts and allowances that have been elevated the focus on driving sales volume and also, reallocating spending to focus more on driving consumer pull for our brands.

Third, simplifying and streamlining the organization to be faster, more capable and more effective. This will require cost restructuring to simplify and right-size the organization. And fourth, they must complete the pace and effectiveness of our innovation program with a focus on increasing our percent of sales from new products and having a better rhythm to our fragrance licensing and acquisition pacing.

We’re already well underway in driving plans against these both priorities which we expect and set ourselves to improve performance in fiscal ‘15 and beyond.

Now, for a discussion of the specifics of our quarterly and year-to-date results. For the quarter, net sales decreased 20.3% of the GAAP rates and 19.4% at constant FX rates. Net sales declined 9% at constant rates year-to-date.

In the third fiscal quarter, gross margins after adjusting for nonrecurring items have been impacted by a higher volume of new fragrance launches in the prior year period and higher promotional environment, which has led to higher sales discounts.

Gross margins this year were also impacted by a higher percentage of lower gross margin distributive brands versus current brands, this forward business this year of distributive brands versus 9% year ago.

Recurring SG&A expenses were lower as compared to last year, the prior year included higher marketing and advertising expenses to support the significant launch activity. However, the percentage of net sales advertising spending was flat as compared to the prior year.

Recurring total indirect SG&A expenses are below prior year at $161.6 million versus $166.7 million. The increase in depreciation and amortization reflects the increments of depreciation expense for IT and capital investment to support the Arden brand repositioning.

Regarding interest expense, it was higher due to $100 million of new senior notes we issued in January of this year. The adjusted tax rate for the quarter was 21.3%.

Turning to the balance sheet, working capital and cash flow metrics. Cash flow used in operations was $35 million as compared to a use of $9 million in the prior year period. Accounts receivables decreased by 10% as compared to the end of the third quarter of last year. DSO decreased by 3 days to 60 days.

We ended the quarter with inventory of $363 million which is $37 million above the prior year. We were expecting that to decline to more normalized levels over the next several quarters in next year fiscal ‘15, we expect working capital to be a source of cash.

Year-to-date capital expenditures totaled $37 million which includes investments in the Arden brand including the new Red Door Spa prototype, at Union Square in New York 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 fiscal ‘14 to total approximately $45 million but to moderate as we move into next year.

Short-term debt net of cash was $11 million at quarter end. And at the end of the third quarter we had $125 million of availability under our credit facilities. Our priorities with cash remain for working capital and operations, investing behind the Arden brand repositioning, acquisitions and share repurchases.

Regarding the non-recurring expenses, we expect to incur approximately $16 million of expenses related to the Arden brand repositioning, of which $15.3 million have already been incurred in the fiscal third quarter.

Additionally, we have incurred restructuring and related costs so $5.3 million so far this fiscal year, primarily related to eliminating sales and indirect overhead positions.

As we stated in the press release and Scott and I mentioned earlier, we are implementing a broader restructuring and cost savings program and we’ll present more details by our next call in August.

With that, I’ll turn it back over to Scott.

Scott Beattie

Thanks very much Rod. And operator, we’ll now open it up for questions.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from Arnie Ursaner with CJS Securities. Please proceed.

Arnie Ursaner – CJS Securities

Hi, good morning. My first question relates to the Arden flagship counters in Q3. I think you gave us the year-to-date number. Can you give us the numbers for Q3 for both domestic and international flagship counters, please?

Kathy Widmer

Hi Arnie, it’s Kathy. In domestic for Q3 in North America, we’d remind you that we – anniversaries, launch of the repositioning in the fall so this is past that. We delivered 11.2% growth and international 18.7% growth.

Arnie Ursaner – CJS Securities

And that was in the quarter you were up 11% or because it said I wasn’t sure if that was the year-to-date or just during the quarter?

Kathy Widmer

I gave the year-to-date in my comments and I just gave you quarter, for the quarter it was 13.5% North America and up 8% in international just for the quarter Arnie.

Arnie Ursaner – CJS Securities

Okay, thank you. And the cost-cutting actions you talked about, is there a time-frame at which we should expect this and have you given any thought or can you comment on the cash cost to accomplish it?

Scott Beattie

I think, as Rod had said, Arnie, we’ll have a full flown plan that present in our August conference call. We’re just going through right now the execution of that and also the budgeting process. So, in our August call we’ll have all the details.

Arnie Ursaner – CJS Securities

Okay. And I know you prefer not to say anything about the whole process with Goldman, but the only broad question I have is, was in reaction to an approach from someone? Or is it your own initiative to pursue this?

Scott Beattie

I can’t comment on any of that.

Arnie Ursaner – CJS Securities

Thank you.

Operator

Thank you. Our next question comes from Bill Chappell with SunTrust. Please proceed.

Bill Chappell – SunTrust Robinson

Thanks. Again, looking at the quarter without having any real guidance, can you kind of give us an idea of what was the delta versus kind of what you were expecting? I mean, how much of it was weather, how much of this was a surprise, how much of this was kind of company-initiated, just trying to understand this was clearly one of the worst performances in a decade? I’m trying to understand how much of that was what you were expecting going into the quarter and how much of it was a surprise coming out?

Scott Beattie

Well, I would say, we’d go back and look at it in a very detailed way Bill. And I would say in the international business as I laid our reminded market into largely enforced, much of it was our own initiative to tighten distribution and improve our margins.

In the U.S. I would say as Joel laid out, at least half of the results are function of the erosion of the performance of our match fragrance was replenishment particularly around this celebrity launch. We anticipated that the weak but continued weakness in that business combined with the weakness in the seasonality and weather just compounded that problem.

Bill Chappell – SunTrust Robinson

And if I’m looking at kind of the commentary on celebrity fragrances, both yours and the market in general, I mean, is this a sign that celebrity fragrances are actually cooling or your two big launches, Bieber and Swift, I mean, I would just say, explosive first year and just very, very tough comps year-two?

Kathy Widmer

We’ve seen cycles like this before. And while they are difficult to predict, we do remain committed to identifying great global celebrity licensing partners and managing tighter for the potential variations in sales. And importantly driving toward higher profitability earlier in the life-cycle, we remain committed to the celebrity business.

Bill Chappell – SunTrust Robinson

Okay. And then just, the last one, I guess, is a question of why are we waiting even until August for some of these changes? I mean, we’ve had problems obviously since this time last year. So why not move forward and go ahead and start making some of these international changes today?

Scott Beattie

Well, we actually have started that in January and February. And we continue to make changes as Rod laid out obviously and I laid out in our Q2 call that we wanted to before we expanded that restructuring have our CFO on board. And also have the benefit give the analysis and his experience and fresh set of eyes. And but, many changes have been implemented over the last three or four months and many more would be implemented over the next two or three months.

Rod Little

Bill, this is Rod. I think I would just add, we’re not in gains. We’ve been actively working and I think we feel confident that we know what to do going forward. We’ve laid out the four points. And we’re already moving forward in some of those areas.

But given these – the cost restructuring components on this, and working field on high quality way and making sure we get the plan right, it’s not easy to do that when you look across a global organization and 20 affiliate markets. And so, we want to make sure we give the proper diligence before we move forward so that we do get it right. It’s urgent and we’re behaving that way.

Back to your first question, I would just add, if you look at the delta versus a year ago and what was expected and what wasn’t, I think there is anniversarying of the big fragrance launch in the base period that we were expecting it was going to be difficult to anniversarying.

There has been some erosion beyond that – that’s about 50% in total of the change, another 25% of the change was distribution choices that were just making different distribution choices now to tighten up the distribution as Scott said. And approximately another 25% that was retail trends inventory de-stocking related with some of the top customer accounts that we talked about in the past. So that’s how I would lay it out in terms of the big picture.

Bill Chappell – SunTrust Robinson

And not to oversimplify, but does that mean you were expecting it to be, sales to be down kind of 10% to 15% anyways?

Scott Beattie

But we laid out our guidance in August and clearly we were short in this Q2. And given the shortfall in Q2, that’s when we pulled our guidance and then we just didn’t feel confident that the trends were tracking and we had anticipated during our – when we provided that guidance in August.

Bill Chappell – SunTrust Robinson

Okay, I’ll turn it over.

Operator

Thank you. Our next question comes from Joe Lachky with Wells Fargo. Please proceed.

Joe Lachky – Wells Fargo Securities

Hi, thanks. So if you could talk a little bit about the innovation comparison and when it laps, are we talking about it lapping next quarter or in Q1 of 2015? And I know you mentioned a number of new products that it sounds like you’re coming out with for the holidays, but maybe you could kind of frame it companywide. Are we looking at a stronger innovation cycle for this holiday season or how would you characterize it versus what we, when we lap those comparisons, what we will start to see in the holidays?

Kathy Widmer

Well, we expect to see that we’ll lap that particular issue with the strong celebrity fragrance sales in the first quarter of fiscal ‘15. We were definitely impacted in our performance by a lower level of innovation which as we said was unusually high, celebrity fragrance sales associated with the acquisitions and distribution expansion. But also several full-line product replacement that we were delivering last year associated with the repositioning.

Its key for us that we renew our focus on delivering impactful new products and programs to drive sales, we are launching a very significant skincare line of products to address the earlier signs of aging as our significant fall. It’s a line extension to Arden which I would describe as comparable to our predicted innovation for fall.

Joe Lachky – Wells Fargo Securities

Okay. And then when you talk about the further de-stocking at your largest mass customers, I’m a little bit curious what’s causing it. Is it all due to the celebrity side but I mean, I guess the data we’re seeing is that retail sales trends and you’ve even said that from a retail perspective, looked to be improving or at least stabilizing somewhat. Why are the retailers continuing to cut inventory, I mean, are we still not to a point where we are selling matching sell-through?

Joel Ronkin

Okay. This is Joel, let me answer the question. First of all, we didn’t stay the large, and it was a couple of our key accounts so that needed to be clear. It’s not necessary the accounts that you are assuming that it is, that’s number one. Number two, a lot of it has to do with some of the big launches we have last year which left inventory in the trade that is over and above just typical inventory levels from the launches, so there is definitely a big part of that and particularly in celebrity.

The encouraging thing and you’re right is that this quarter is the first quarter where we’re seeing the category will be starting to get to sales which are more normal for us. Basically the category was slightly, we were slightly down which is largely related to lacking of celebrities.

So, in the mass channel, it’s starting to get back to more normal patterns which you would then expect inventory to ultimately catch up as well. But there were few unusual situations with inventory and a few brands with some accounts which had an impact this year when you compared with the last year in particular.

Joe Lachky – Wells Fargo Securities

Right. And how long before you think that inventory drag will be visible on your numbers here?

Joel Ronkin

I think we are at least into the beginning of next fiscal.

Joe Lachky – Wells Fargo Securities

Okay. And then just last quick question. The $40 million to $50 million in the restructuring program, does that include an impact of savings from switching to distributors in international market or is that a separate initiative from the restructuring program?

Scott Beattie

No, it is not included. That would be separate.

Joe Lachky – Wells Fargo Securities

Okay, thank you.

Operator

Thank you. Our next question comes from Joe Altobello with Oppenheimer. Please proceed.

Joe Altobello – Oppenheimer

Thanks, good afternoon. First question is, I just want to go back to the restructuring and cost savings program, and the four pillars that you guys laid out today. It looks like at least two of them were things that you guys have done in the past, whether it’s improving distribution, particularly on the international front, as well as improving gross margin.

And then the third one I wanted to focus on was innovation. I think that’s something that you guys do on a recurring basis. So, just curious what’s going to be different about this program than what was done from, let’s say, 2009 to 2013, when we did see that nice ramp-up in gross margin throughout the business?

Scott Beattie

Well, I mean, improving gross margin and improving EBITDA margin has sort on an ongoing process. And certainly the step-back that we’ve taken this year and particularly in gross margin has been very disappointing.

And as we lay out the recovery plan for our business, the fundamental challenge that we have as Rod articulated if they were not giving the rate of return, our direct and indirect overhead investment primarily in our international business but also to some degree in our North American business.

Our cost structure and particularly fixed overhead cost structures, too high for the level of business, i.e. we’ve got a fragmented business around the world. And the migration more towards regional distributors that have existing commercial infrastructures that we can leverage and allow us to take some of that overhead out of our business and just become a leaner simpler business to operate.

It’s a decision that we made, it’s a decision I think will ultimately allow us to ramp up the commercialization of our brand more profitably over the long-term and certainly in key strategic markets like the Middle East, Southeast Asia, Northern Asia, Eastern Europe, Latin America.

Markets that were going leverage distributors primarily and joint ventures rather than having our own affiliate structures into the investments behind those affiliate structures, will give us more operating leverage in our business model.

The other advantage that again Rod addressed, the fact that it will also free up more money to improve our share voice and the pull from consumers on our brand. And that’s the direction we’re moving down, we’re doing in a more robust way than we have in the past. In the past we’ve aligned on trying to grow the top-line to leverage our overhead structure.

And we realized we don’t have the benefit of that – we haven’t effectively done that. So, we got to right-size our cost, right-size our business model, create more of a variable cost model so that we have a lower level of breakeven. And at the same time we can, as I say, leverage more commercially develop distributors and regional partnerships.

Joe Altobello – Oppenheimer

Okay.

Rod Little

Joe, I would just add, sorry, this is Rod. I obviously wasn’t here in 2009, to be able to compare and contrast, that’s different if the plan sounds the same we’re similar. But what I can tell you is we’re going to go after this with a real ROI focus, where do we get financial returns and we’re going to be very disciplined about how we move forward across these four elements. And I think the cost restructuring is simplifying and streamlining is a new element that is really important is bringing this all together.

The second thing I think we’re going to do when it comes down to operational discipline but it’s focusing on the key metrics, they’re most important in driving shareholder return and value. And being very, very focused on that as an organization with everyone claims in the role, getting into a disciplined reliable approach that over time as you pull these triggers together, they put you to a good place.

So, I think there is nothing controversial but it’s how we’re going to bring the items together to sort of make a difference.

Joe Altobello – Oppenheimer

Okay. Because it sounds like the tightening of inventory or distribution was ongoing, but it’s being more intense this time around. But what seems like its new is the joint venture structure you guys are going to be pursuing internationally. So I guess my second question is, how far along are you in that process of forming joint ventures and discussing partnerships with distributors?

Scott Beattie

We’re in active discussions in multiple regions. And so it’s underway I wouldn’t comment more than that.

Joe Altobello – Oppenheimer

Okay. Any idea of the timing or it’s still too early to tell at this point?

Scott Beattie

I think you’ll comment further than that.

Joe Altobello – Oppenheimer

Okay. All right, that’s all for me. Thanks, guys.

Operator

Thank you. Our next question comes from Jason Gere with KeyBanc Capital Markets. Please proceed.

Jason Gere – KeyBanc Capital Markets

Okay, thanks. Actually just one question. Rod, you were talking earlier about Wella and some of the similarities and the challenges that you are seeing, we are seeing here with the fragrance business.

So, I was just wondering if you could just provide some context into the before and after with Wella, what you’ve seen just in terms of a glimmer of optimism that we should expect down the road? And then I just have a couple of other questions afterwards.

Rod Little

Yes, so, first Jason, the fragrance model is very different than the Wella model. The skincare I would say portion of the portfolio is more similar. But if you look at the Wella experience, the top line was declining year-on-year, the cost structure was not competitive versus L’Oreal, Lottery but I think we had implication of salon division.

And the organization was complex as we moved from global marketing teams into local organizations, trying to provide the right input on what products they needed to win and how that would work. And so, when you look at the issues that we faced today, we’ve got a declining top-line that’s very similar, the way out of the declining top line is to have a more robust innovation pipeline that puts better things in the pipes faster.

The team is actively working on that. And then, when you look at the cost structure you have to right-size the indirect overhead to fit the size of the top-line business you have. And when we look at in the sets where we are today and how we see the next 12 to 18 months, Scott said it earlier, we’re not going to bank on sales increases that we’re uncertain about, we’re taking a very conservative viewing of what that next 12-18 months looks like. And we’re going to make the tough choices to right-size the indirect to fit that.

And so, I would say those are the two big installments that are similar even it’s not rocket science and we don’t want, we know how to do that. And then the third element that I think is also similar, there is a gross margin disadvantage at Wella, there is a gross margin disadvantage here.

And that’s just being very disciplined about pricing, mix, discounts and how you put a program together to drive mix sweeteners, pricing sweeteners and discipline on discounts and allowances every country, everywhere in the world. And so, we’re going to have to get that in place. I think all three of those are very, very similar from my experience in the past.

Jason Gere – KeyBanc Capital Markets

Okay. Thank you for the color. And then I guess just as the restructuring changes start to come and cost savings come through, I guess, one, it seems like a fair amount will be reinvested back into driving the topline. So, I know you’re not really talking until August, but I just wanted to see if we should be thinking about don’t expect a lot of that to flow to the bottom line; it’s more about reinvesting and driving the topline?

And secondly, as I guess, as you free up more cash, can you talk maybe about the existing portfolio and thinking in context with an earlier question about maybe designer versus celebrity portfolio, is there a need maybe to kind of shift the emphasis towards looking at acquiring some designer fragrances to add to the portfolio, especially for maybe Western Europe? Thanks.

Rod Little

Yes, so, Jason I would say it’s too early to give you any guidance or direction on how we’re thinking about reinvestment. Although Scott said it earlier, share voice is important in this business especially in developing markets in Asia in particular. And so, we’re going to need to find a way to add fuel to the business but I wouldn’t comment on how we see that at this point, we’ll talk that in August.

And on the portfolio front, we – I think one of the keys thoughts is we want to make sure we’ve got the right pacing of when we bring things in, that it cleans celebrity and designer as we go forward. And on the designer front, it’s – we want to look for the right clips in our portfolio not only here but in the U.S. but also in Europe. And so, that felt we’re just going to have to get better from the pacing standpoint but it’s still an important part of the model.

Jason Gere – KeyBanc Capital Markets

Okay. That’s it for me. Thank you.

Operator

Thank you. Our next question comes from Patrick Trucchio with BMO Capital Markets. Please proceed.

Patrick Trucchio – BMO Capital Markets

Hi, thanks. As you look to improve the cost structure of the business, could you tell us what capabilities are being built up internally versus what’s being outsourced?

Scott Beattie

Well, I would say that the key to build these are core to moving forward on brand marketing and key commercial execution in our most developed markets that’s North America, the U.K. certain markets in Europe and that would be the primary focus areas. And I would add couple of retail to that.

When we move beyond that we outsource our manufacturing product, we outsource our distribution, we outsource our systems. And while pre-closing is to rely more heavily on third party distribution arrangements, which we have a significant number of, but additional regional distributors that have strong commercial platforms that can commercialize our brands more quickly than we could on our own. And so those are the areas we would – that we would look at outsourcing.

Patrick Trucchio – BMO Capital Markets

Okay, thanks. And with the understanding there have been a lot of unusual pressures this year do you think the average growth from 2009 to 2013 is the right long-term growth rate for the business, and if not, how should we be thinking about the long-term potential for the top and bottom line?

Scott Beattie

I’m not sure we’re in a position today to give you a confident number on that one in terms of trade. I don’t think the long term growth rate that we’ve experienced has been particularly in the last few years given a recovery out of the financial crisis and so on is ultimately the long-term growth rate of our business.

But I think when we come back in August we’ll have a more robust plan and develop some of the commercials plans in more detail, I think we could comment further regarding that.

Patrick Trucchio – BMO Capital Markets

Okay. Thanks very much. That’s it for me.

Operator

Thank you. Our next question comes from Linda Bolton Weiser with B. Riley & Associates. Please proceed.

Linda Bolton Weiser – B. Riley & Associates

Hi, so I thought you said that the Elizabeth Arden flagship counters were down 13.5% in North America. Did I understand that correctly and is that your shipments or the sell-through?

And then related to that, why is that, I mean, do you view the repositioning as having been a success or not a successor, or somewhere in between? And also, are the declines that you are seeing, is it more, I mean, I don’t think you gave the skin color versus fragrance in the quarter versus the down 19% for the whole brand. So could you give a little more information there? Thanks.

Scott Beattie

In terms of the repositioning towards for the quarter in North America, are down a little bit, we’re located within the Northeast, maybe particularly tough in some of those stores that were located in the Northeast and particularly in New York.

But we actually see improvement in going forward path in the March period and so some of this is also the timing of the Easter shift. And so, we’re – we don’t see that as a big change from where we were. We feel good overall with we’re out with the reposition doors. Remember we left huge increases but prior years, some of those doors. And so, overall we feel really, really good with we’re out with the repositioning.

Keep in mind that we’ve only touched 130 to 150 of the doors in total in North America out of our 1,000 or so doors, so there is still lot of room. That’s a bigger issue than what’s going on with the repositioning doors right now.

Linda Bolton Weiser – B. Riley & Associates

Well, as a follow-on to that, are you – where are you on the process of continuing renovations, are you still spending more on CapEx, what renovations are you putting temporary halt to that or what’s the take, is it the same as it was or slower or?

Rod Little

Well, it’s a little slow only because we hit so many of the big doors at first. But we’re still continuing our roll-out and we’re still committed as ever to the repositioning. If you talk to our accounts about how the repositioning is going and how Arden is doing compared to the performance of others in their category, I think overall we’re doing fairly well. And they’re pleased with what we’re doing.

Scott Beattie

In terms of the capital investment, as just kind of differed to Rod that obviously we’re going to be very disciplined in terms of how we deploy capital and making sure that we have the right return on investment.

Rod Little

Yes, and then we will just look at that investment versus and the other new developments, whether the potential acquisition, whether the expansion in other markets, where we need to invest. Because I think we have signaled before, we expect the capital spending to moderate as we go forward, as we get more focused on return on investment in total.

Linda Bolton Weiser – B. Riley & Associates

Okay. Thanks very much.

Operator

Thank you. Our next question comes from Carla Casella with JPMorgan. Please proceed.

Paul Simenauer – JPMorgan

Hi, this is Paul Simenauer on the line for Carla Casella. Given the weakness that mass retail do you think we could see them go back shelf space for the category for the back half-holiday next year, is that a worry that you guys have?

Scott Beattie

Yes, we actually – remember, keep in mind that we’re actually seeing improvement right now in the category in terms of retail sales with the shipment that’s here right now. And we don’t foresee a pullback in terms of space at this point. We never know but that’s not all foreseeing at this point.

We already are working on getting commitments for holiday shipments. So, we’re planning to continue business as is in terms of space and then in fact working on lot of programs to improve the performance of the category.

And as I said, when you look at our retail performance, retail sales is actually encouraging, it is actually starting to improve somewhat from what our first half from our fiscal, the second half of our retail this year.

Paul Simenauer – JPMorgan

I have one more question, can you talk about bookings, are potentially partnering some international markets. Could you talk about which markets you think you could perform better under a partnership arrangement or whether you be in licensing or operational distribution type partnering? Thank you.

Scott Beattie

I think it did already. And we’re in the key markets, the markets that have those largest fastest growing beauty segments where we have relatively small partners. And that would be the Middle East that would be both Southeast and Northern Asia. And that would also be selective markets in Latin America.

Now, we do have distribution arrangements in some of these markets currently. But I think what we’re pursuing in our more extensive commercial arrangements and joint ventures in those regions that with stronger partners that can help commercialize our brands.

Paul Simenauer – JPMorgan

Thank you.

Operator

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

Scott Beattie

Thank you operator. Thank you everyone for joining us today.

Operator

This concludes today’s teleconference. You may disconnect your lines at this time. And thank you for your participation.

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Source: Elizabeth Arden's (RDEN) CEO Scott Beattie on Q3 2014 Results - Earnings Call Transcript
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