Perry Ellis International's (PERY) CEO George Feldenkreis on Q2 2015 Results - Earnings Call Transcript

| About: Perry Ellis (PERY)

Perry Ellis International, Inc. (NASDAQ:PERY)

Q2 2015 Earnings Conference Call

August 21, 2014 09:00 AM ET


George Feldenkreis - Chairman and CEO

Oscar Feldenkreis - Vice Chairman, President and COO

Anita Britt - CFO


Ed Yruma - KeyBanc Capital Markets

Ronald Bookbinder - Benchmark

Robbie Ohmes - Bank of America Merrill Lynch


Good morning ladies and gentlemen and welcome to Perry Ellis International’s Fiscal Year 2015 Second Quarter 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 the prepared remarks 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 we have filed with the SEC. Joining us 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 Mr. George Feldenkreis. Please go ahead, sir.

George Feldenkreis

Good morning and thank for joining us. We are glad to be with you and to take you through the good second quarter results and the progress of our company’s strategic initiatives. While our revenues were down 4% compared to last year, following our decision to exit lower profit businesses, we’re able to substantially improve our operating income compared to last year and consequently reduce our adjusted net loss for the quarter from $0.15 in prior year to $0.08. It should be noted once again that second quarters are weakest quarter of the year. We continue the project which started last year to increase the profitability of the company.

Expenses were well managed during the quarter with growth coming in $2 million below last year level. We continued to streamline our expense structure as well as the underperforming areas of our businesses. As proof of the successful implementation of this initiative, we delivered gross margin improvement of 220 basis points during this quarter. we are also glad to report that inventory had decreased 4% compared to the same time last year, despite strong key growth initiative which required no inventory investment such as Callaway Europe, Jack Nicholas, Ben Hogan Signature and Rafaella Sport.

We feel very good about the composition of our inventory position adding to the second half of the year. Moving to our direct-to-consumer businesses, sales in the second quarter increased over 15% over last year. Comp sales including ecommerce which increased 5% in the quarter year-to-date, comp sales are up 7%. Direct SG&A has been reduced by 420 basis points and total direct operating income has grown 6% versus minus 1% last year. The strong improvement in our retail profitability speaks volume to the successful changes we have initiated last year including the new operating structure which stood at this past May for Original Penguin.

We believe the result demonstrate the excellent progress made which steadily grows shares and significantly improve gross margin our retail operation while continue to tighten and manage our expenses, all with an eye towards profitable growth. Our U.S. retail store business grew 2.7% on a comp basis despite the traffic decline of minus 3.2% for the quarter. The refinement of our merchandising and marketing strategy significantly improved our sales conversion levels which drove growth. Year-to-date, Perry Ellis stores are comping 4.5%. We are driving growth through our heritage dress business.

The rollout of key item program for sportswear and the introduction of our new luggage and footwear business. A notable metric is that our Perry Ellis store profitability tripled this quarter as compared to the same period last year. Original Penguin retail achieved Q2 comp sales of plus 4.7% versus Q1 comp sales which were essentially flat. Despite Q2 comp traffic being down minus 7%, conversion showed significant improvement. While we have experienced some positive momentum this quarter, we recognized that Original Penguin retail has still work to do. We have made changes to staffing and scheduling and also cleared page growth to make room for fresh products.

Looking ahead to fall, we anticipate our retail store business to continue to outperform on certain traffic trends. In early September, Original Penguin will roll out an accessories initiative with new assortment investment and presentation strategy for all stores which we expect will double the brand high margin accessory sales.

Moving to ecommerce, our business is comping plus 30% year-to-date. Callaway Golf launch this year is quite notable and sales performance has significantly exceeded plan.

In addition, our business with other ecommerce sites grew by 16% for the quarter. Business with Amazon grew 60% for the quarter driven by close collaboration with our marketing initiatives. International development and expansion remains a key initiative on our performance in Q2 validate both the strategy and the execution. Our international operation recorded another 27% increase in net revenue. In Europe, net sales increased 34% and more encouraging gross profit margins were maintained. Our initiative in Europe to expand Original Penguin and Farah Vintage beyond the historic UK base continued to be successful. While European wholesale business was up 35% and new partners in France, Italy, Spain, Benelux and other markets are gaining important traction and registering quick wins.

For fall, we have new doors rolling out at key retailers such as Galeries Lafayette and El Corte Ingles. For spring 2015, we are converting to consensus in Coin flagships in Milan, Rome and Florence. The excitement and energy associated with Original Penguin has generated more support from key UK partners like House of Fraser and Scott’s and attracted significant interest from prospective partner in other markets in Europe, Eastern Europe, Africa and India. Meanwhile Farah Vintage continues to outperform expectation with an 89% increase in revenues in the quarter, the brand remains the top two brands which key partner as Urban Outfitters and Asos. Our European direct-to-consumer initiatives are also working and revenue was up 29%.

After a slow start in this financial pool legacy real estate, we have accomplished an important turnaround in Original Penguin retail and are now recording positive improvement in four-wall contribution. This turnaround supports our commitment to expand Original Penguin retail directly and via partners. And we are especially pleased to record a 32% increase in our European ecommerce revenue in the quarter. Another business in Europe, Callaway has outperformed our plan and will anchor our expanding golf business in Europe in the coming years. We are continuing to see productivity and return on the capital investment, we have made in people and infrastructure.

We have secured placement and prepared relationship with many of the UK and Europe’s leading golf retailers. In 2015, we expect to deliver at this platform and this partnership to expand sales as we build a path for profitability for this important strategic initiative. Direct expansion in Canada remains a natural and attractive lynchpin of our international development strategy. We have made disciplined investment in people and platform to support our Canadian expansion with key partners like bebe. Early returns in this initiative are encouraging with a 57% increase in revenue in the quarter. Our heightened focus on this market has been rewarded with increased receipts and plan for 2015 and enhanced business and real estate in many doors.

We will have opportunities in the coming quarters to expand our direct operation as licensing categories of business become available. We are also encouraged by performance of our direct business in Mexico as well as the progress of our key partners in expanding penetrating of Perry Ellis, Original Penguin, Nike Swim and Golf in Mexico. We have developed strong relationship with key retail partners such as Liverpool, Palacio de Hierro, Marti and believe this market shows great promise for further expansion and more aggressive direct development both wholesale and retail. The licensing business continues to perform at a high level with licensing income growing 4% in the quarter and over 6% year-to-date.

This growth is a testament to the power of our brand and the quality of our brand partners. We have however continued to campaign work of great certain licensing partners. To that end, we have or will exit certain legacy licenses. Adjusting for exited licenses, licensing income would be up 10% in this quarter and nearly 13% in first half. We believe that will benefit from our decisions to trade up as we move forward. The licensing team has been quite active, signing eight new agreements in the quarter, bringing our year-to-date total to 12 new agreements. We have an active pipeline of new business opportunities across all geographies which will ripen into more new license agreement in coming quarters.

Our group has been especially active in Europe, Asia and Latin America and we expect significant whitespace in this market for our portfolio of powerful brands. More important, our license partner for Perry Ellis, Original Penguin and Laundry continue to drive their business and ours. We are especially encouraged, recorded 23% increase in Original Penguin royalty revenue and 53% increase in Laundry royalty. We are glad to report that our direct-to-consumer initiative, licensing and international business this quarter amounted 26% of revenues compared to 21% last year.

During our last call, we showed that almost all of our retail partners did not comp sales as expected but only handful did better. The competition for the retail dollar has become more intense not only between vertical retail, department store appraiser and chain store but also with electronics, automobiles et cetera. The consumer has more choices than ever of where to spend his money while the reality is that many consumers have seen a reduction of their disposable income.

Before, I turn the call over to Oscar; I would like to emphasize that management interests are fully aligned with the interest of our shareholders. We will continue executing our strategies of improving the performance of your company.

As Oscar will discuss, the team is focused on five key priorities to enhance profitability. At a high level, this priority is aimed to direct resources of the company on businesses and brand as well as drive efficiencies across the operating platform. While, there is more work to do, our result from the two last quarters’ have demonstrated we have a right plans in place to achieve success and we will continue implementing them as we believe it will produce the best reward to our shareholders. Also, please keep in mind the purpose of today’s call to discuss our earnings result and we would appreciate if you could please keep your question during the Q&A session, focus on that topic.

We do not intend to make any further comments during this call regarding statement by activist organizations and we thank you for your cooperation in that regard. With that, I will now turn over to Oscar.

Oscar Feldenkreis

Thank you, George. We are pleased with our second quarter performance which demonstrates continued positive momentum in our business. Our results were ahead of our guidance and analyst’s expectations. Our improved operating performance clearly demonstrates a successful execution of our strategies as we continue to focus our resources on our growth businesses and driving efficiencies and cost savings across platforms. Specifically in the quarter, we positioned our key brands for improved performance at retail, highlighted by the strengthened sell-through rates for Perry Ellis. We continued success in our Original Penguin, Nike Swim and Golf platform and successfully expanded into the sport category for Rafaella.

We increased the penetration of our revenues to higher margin growth channels of international, direct-to-consumer and licensing. We capitalized on the global potential of our brand with international accounting for over 12% of our total revenues and growing 27% over the prior year. And we have increased our efficiencies as we collaborate and applied best practices across our brands and businesses and reduce direct sourcing and indirect corporate expenses. While top-line was down slightly as expected, we reduced lower margin private label on exclusive brand revenues. We achieved our objective to deliver more profitable sales. Importantly, we are delivering assortments that are meeting the expectations of our customers.

I am especially pleased that with have achieved these results while operating in a challenging retail environment and we believe we are well positioned to continue this positive momentum through the fall and holiday season. Reviewing our performance in more detail, I am beginning with Perry Ellis. Our laser focus on improving the execution within our Perry Ellis brand drove increased sell-through rates and strengthened margins at wholesale accounts. Our spring season with Perry Ellis sportswear collection was even to last year on comparable doors as expected. Total sales were down as a result of our strategy to refine the business on a door-by-door basis. Therefore, we are entering the fall season in a significantly better inventory position with less spring carryover compared to the same time last year.

Our strengthened performance is leading to increased bookings for spring 2015, highlighted by better placement and more shop-in-shop opportunities as well as new door opportunities. As it relates to shop-in-shops, we ended the spring season with 21 and representing growth of 16% over last year. We expect to rollout an additional 42 doors during the third quarter, bringing the total to 63. Looking ahead to our fall product, we will continue to capitalize on our dressy strategy and we have developed enhanced value added performance features. For example, we are adding non-iron properties to our woven sports shirts, as well as wicking and moisture management properties to our knits, to our bottoms and suitings, which we will further resonate with our consumers, we’re seeing active inspirations meets ready-to-wear fashions. We are also pleased to announce the Perry Ellis will return to fashion week on September 4th, our spring 2015 line was well received at market and we look forward to showcasing our assortment to the public. We fully expect to see Perry Ellis sales growth next year. Original Penguin delivered strong double digit sales growth reflecting broad-based growth across all product categories. The brand enjoyed strong sell-through of its fashion product at regular price and we expect this trend to continue during the second half of the year. We are excited with the denim launch in wholesale and as well as in our retail doors. The small tests we have seen is good and could be a new opportunity for Original Penguin.

PEI Golf reported a 14% increase with an 8% decrease on inventory compared to the last year and continues to dominate the golf lifestyle apparel spreads. Our unique industry leading portfolio of golf brands continued to capture additional market share. As it relates to the category in total, we feel it is important to note that golf apparel and non-green grass channels, which represents the majority of our sales continue to be positive. So while the broader golf market including hard goods and green grass sales are reported down in total, the channels and categories that we participate are in healthy and we’re growing and taking market share.

The strong performance to reflect the evolution of golf performance apparel which is no longer strictly warrant on the golf course but has become a staple of a man’s wardrobe today for all occasions replacing traditional sportswear attire. PEI Golf is positioned to further capitalize on the explosive growth of active-wear at leisure apparels space which according to NPD is set to grow to $178 billion by 2019. PEI’s advantage is its ability to combine fashion with performance enhancing fabrication. We expect that overtime as functionality continues to mix with fashion, the lines between golf apparel and athletic apparel will continue to blur. This has been a key to our golf portfolio of brands.

Looking at ahead to Q3, we will be introducing performance cotton across all of our golf lifestyle brands. We have enhanced all of our golf lifestyle brands which will excite and create a lifestyle needed for the consumer to replenish his wardrobe. Ben Hogan at Walmart has been very exciting. Our comp store sales are up 14% in the U.S.A. and our Father’s Day advertising campaign proved to be a success. In Canada, we closed our first season above plan plus 8% and we have received future growth opportunities enhancing the Ben Hogan golf lifestyle brand as well as licensing opportunities and we’re excited that we will be partnering with Walmart UK for holiday.

The Callaway Golf brand strengthen continues to capture market share and PEI achieved another quarter of double digit growth for the Brand. European Callaway bookings for the fall ’14 are solid and the reception of our strength ’15 collection is excellent. In addition, Callaway’s golf profession apparel ambassadors have collectively won eight tournaments this year more than any other competing brands. Rafaella's overall performance reflected the challenging environment within the better sportswear zone. With shipments trailing to prior year, we are pleased however with our sell-through performance and made progress toward our growth initiative within the brand.

We continue to introduce additional replenishment programs in bottom to further enhance our collection. Rafaella today offers a woman the ability to purchase several different fits in bottoms. Rafaella sport performed well on recorded growth in the quarter. As you may recall, Rafaella sport launch as a capsule last holiday in 100 doors and is currently in 150 doors. Our retail partners are giving us added space for this sport brand. In fact, we installed our first shop in Belk's Dallas store and are installing an additional 25 shops this fall in Belk and Bon-Ton with additional rollouts plan for spring 2015 for Belk, Bon-Ton and Lord & Taylor.

We are extremely with our Nike Swim business. Retailers have expressed their enthusiasm for this quarter from the Nike brand. As you may have heard from many retailers active performance has been a standout category this season. Nike Swim had a solid performance albeit a smaller swim quarter on top of a 38% increase in last year’s second quarter. Women’s performance drove our growth with particular strength in the department and specialty stores as well as our teen business. Nike Swim innovative product development continues to drive sales. The brand’s new lead suit has been well received by top swimmers and is selling well ahead of our expectations.

On the fashion swim side, our momentum continues as we just wrapped up a terrific swim show held in Miami last month. Many of our top customers reviewed our offering for next spring where we received a very positive reaction on this line and are currently in the mix of booking for next season.

Overall, we’re very pleased with the direction of the business across our brand and expect to remain focused on product execution supported by a portfolio of compiling brands, this will enable us to continue a positive performance in the second half of the year. As we move through 2015, we’re focused on optimizing our portfolio and reducing cost and have five strategic priorities to enhance profitability these include continuing the strategic review of the company’s portfolio of brand with a goal to exit non-core low growth brand and businesses driving efficiencies and generating cost savings through processed enhancements, pursuing international growth through both direct investments in North America and Europe as well as through strategic partners with licensee good partners expanding the direct-to-consumer global foot print. This includes the expanding the brick-and-mortar presence and enhance the original Penguin and Perry Ellis brands by leveraging their competency of its retail teams in the U.S. and Europe with third-party licensees. Optimizing the position, and positioning and competency in the menswear arena through wholesale retail and licensing of its core brands.

With that I would like to turn the call over to Anita to review our financials in more details. Thank you.

Anita Britt

Thanks Oscar and good morning all. Our second quarter fiscal results in ahead our expectations and adjusted earnings per share and within our guidance range for total revenues. This was especially gratifying given the traffic patterns of retail were negative throughout the quarter with a rebound experience in the latter half of July. I’d now like to take you through our results for the quarter and provide some additional color regarding our business segments.

First revenue in our men’s wholesale segment totaled $147 million as compared to $153 million last year a 14% increase in golf lifestyle apparel and strength in the origin Penguin brand was more than offset by planned decreases in private and exclusive branded products, that we realized approximately $10 million in reductions during the quarter and anticipate the full year impact of total $20 million.

Women’s sportswear totaled $26 million for the segment as compared to $32 million in the second quarter of last year attributed to a shift in shipments for Rafaella into the third quarter as well as lower sales in our laundry business as we refine distribution to focus on full price specialty stores and reduced programs to the special markets channel. We expect women’s to be impacted by $3 million in private-label exit this year. In our direct-to-consumer segment revenue totaled $22.6 million as compared to $19.6 million. The 15% increase in direct-to-consumer was driven by a 2.7% increase in comparable store sales and a 20% comparable increase in e-commerce.

Our Perry Ellis and original Penguin stores delivered positive comparable sales with increased version and average dollar per transaction more than offsetting negative traffic spend. Licensing revenue totaled $7.5 million for the quarter, an increase of 4%. Contributing to this increase was strength from our original Penguin partnership for those footwear and international retail stores as well as the new licensing agreements that we have discussed.

We continue to focus on capitalizing on the strength of our brand by adding new product categories and geographies served through licensing. We are currently evaluating many new opportunities and have solid pipeline in place to achieve our licensing goals.

Moving on to gross margin. Here our emphasis on higher margin channels and geographies grew successful and fill the 220 basis point expansion in gross margin 34.6% for the quarter. More specifically, international which represents over 12% of total revenues for the quarter as compared to 9% in the prior year. Direct-to-consumer represents 11.4% of total revenues for the quarter as compared to 9.7% in prior quarter. We also realized stronger margins in our direct-to-consumer mix through lower promotions in all venues.

Finally, private and exclusive branded product represented 17% of our sales for the quarter as compared to over 20% in prior year. We also have some positive news of the expense front.

We realized $2 million of cost reductions for the second quarter approximately $1 million or half of this cost reductions was reflected in lower cost of good as we achieve logistic efficiency. The other half or $1 million of savings was generated through reduced employee cost, travel cost as well as professional fees.

The SG&A savings reflected in the quarter were partially offset by investment in our growth initiatives including Callaway’s Europe launch and expansion of Original Penguin in the continent. We also realized approximately 300,000 in negative currency translation due to the strengthening of U.S. dollar at quarter end.

Turning to the balance sheet, we ended the quarter in a very solid position. Our net debt position totaled $100 million reflecting a net debt-to-total capitalization of approximately 22%. Receivables totaled $111 million, a 21% decrease over prior year reflecting timing of shipments through the quarter. Our receivables and aging are extremely strong and the overall health of our retailers remain solid.

Inventories totaled a $175 million at quarter end compared to $207 million at year end and $179 million in the prior year. We are very comfortable with the level and the composition of our inventory as we enter the third quarter. We continue to see a reduced level of clearance goods from prior year and believe that we have managed our levels very well both on our own balance sheet as well as at our retail partners as Oscar spoke to.

We ended up generating $47 million in operating cash flow for the six months period as compared to a source of $14 million prior year for an increase of $33 million. We ended up utilizing $7.3 million in capital spend from operating cash flow primarily for the completion of our showrooms in New York and our in store shop as Oscar discussed.

Turning to our guidance for the year, we’re pleased with our positioning as we enter the second half of the year. We do believe it’s prudent to continue to take a conservative view as retailers are expecting to manage business receipts for faster inventory turns as such we’re maintaining our guidance for revenue in the range of $910 million to $920 million for full year. By business segment we continue to see men’s sportswear, revenues even to prior year and just to reiterate this reflects an increase in golf with growth in the Callaway line, PGA Tour, Ben Hogan as well as the addition of Jack Nicklaus.

We are also planning growth in Nike swim across all channels as well as growth in our Original Penguin wholesale business. Offsetting these increases, our expectations for lower replenishment sales in certain areas of our business and the impact of planned private and exclusive label brand exits from the prior year. In women’s sportswear segment, we’re adjusting our expectations for the segment’s revenue down slightly were approximately $130 million for the year.

In our direct-to-consumer segment, we’re planning revenues to grow to approximately $90 million an increase versus our prior guidance, reflecting year-to-date comp of 5.8% for the first half and 2% to 3% comp increase in retail for same store sales for the back half of the year. Our first half e-commerce comp increased 30% and we planned the back half up mid teams. We’re very encouraged by the progress that our direct-to-consumer team has made overseeing all of our businesses.

This was demonstrated by the growth that we saw in sales and improved execution in our Original Penguin store base in the month of June and July despite challenging traffic. We see licensing revenues increasing by 4% to 5% for the year reflecting continuing growth in our existing portfolio led by Perry Ellis and Original Penguin brand.

The team has also been enhancing the value of our license-only brand, which contributes approximately 10% of our overall licensing revenue. Guidance for our gross margin is expected to be in a range of 33.8% to 34% for the full year an increase over our prior guidance.

Turning to expenses, we realized approximately $4.2 million of cost reduction during the first half of the year between cost of goods and SG&A. We expect to see the expense savings accelerate into the second half of the year driven by our continued focus in logistics, all the way gone through employee expenses as well as other operational cost.

In total for the year, we expect that, our $9 million in cost savings will be split approximately $4 million to be realized in gross profit and $5 million in SG&A with approximately half of our SG&A savings reinvested in our Europe business as we spoke about. We continue to be very diligent in our management of expenses as we look to gain efficiencies across all aspects of our business. Updating you on our consulting review, we have completed the review of our supply chain from design to our sourcing function.

The results for the review tell us that we’ve very good process even system but there is always room for improvement. In terms of next step, we’ll be working with our internal team in piloting and then implementing the recommendation with a focus on the largest wins initially. The initial pilot will focus on our production calendar with a drive to reduce our calendar time as well as implementation of operational efficiency, rapid design and production cycle, based on these areas implementation will commence next month and we’ll be substantially completed by the end next year. We expect to realize improvement in operating margin expansion over the next 12 to 24 months. There are also additional recommendations that we’ve already begun to implement which will prove to be quite accretive as well. We will continue to direct our resources towards high return investment and as such a portion of our savings will be reinvested to fund growth in our international platform through both direct operation as well as partnership. All of these initiatives that have been underway are integral for the Company to drive to our goal of delivering a 10% EBITDA, which we believe we can achieve to expand the growth margin as well as a well-controlled expense base.

Even our better than expected earnings for the first half of the year, we’re raising the bottom end of our guidance range. We currently expect adjusted earnings per share in a range of $0.85 to $0.95 for the full year. As we look at our third quarter, we see revenues falling in a range of $210 million to $215 million and we expect expansion in growth margin in a range of 33.8% to 34% as compared to 33% in the prior year. We see expenses consistent with the second quarter and we are forecasting adjusted earnings per share in the range of $0.02 to $0.06 as compared to a loss of $0.15 in the prior year.

As we look at the balance sheet, we have already been extremely disciplined with our inventory management but we anticipate that there will be additional reduction opportunity for yearend as we look to continue to drive a faster turn and reduce weeks of supply. In wrapping up my overview, we feel that we have and are taking for correct strategic news within our company to drive improved profitability.

I will now turn the call over to the operator to open up the call for questions.

Question-and-Answer Session


Thank you. Ladies and gentlemen, our question-and-answer session is conducted electronically (Operator Instructions) And we’ll go first today to Ed Yruma with KeyBanc Capital Markets.

Ed Yruma - KeyBanc Capital Markets

Hi, good morning. Thanks for taking my question. Anita, first on the cost reduction, $9 million for the year, I think you said half of it was cost of goods. Will that flow directly to the bottom line, or is some of that needed to reinvest as I think you are with SG&A in supply chain or other cost-saving initiatives?

Anita Britt

Hi, Ed. On the cost to goods savings those will flow through to the bottom line. We estimate that that will be about 40 basis points expansion for the quarter and honestly we already realized half of that in the first half of the year which was reflected in our expanded gross margin. We do anticipate from the consulting review and the recommendation that will be working over the next 12 to 24 months so there will be additional gross margin expansion opportunity as well.

Ed Yruma - KeyBanc Capital Markets

Got it. And I think on the planned reduction private label, you are roughly halfway through your guidance for the year of $20 million. Is that kind of falling evenly between the quarters? And I guess from a longer-term perspective, at this stage now, is private label at kind of your desired component of mix?

Anita Britt

Yes, Ed, actually the overall $23 million of exit is the first three quarters that are -- there will be an impact on the third quarter. We are fully anniversary by the end of the third quarter so fourth quarter will be an apples-to-apples on increased opportunity. In terms of our desired layout, we got to couple very large private branded programs that we have worked with, with some of our key retailers for a long time. Their attractive program we intent to keep in place so we do feel that the platform that we’re going to be moving forward with is a very solid platform. Again, there is always room for adjustment but we’ll see fairly worked out by the end of the third quarter as I mentioned.

Ed Yruma - KeyBanc Capital Markets

Got it. And final question, you know you talked about kind of interesting in international. Could you give us a little bit of insight into kind of how the margin structure for international looks, and how do you think of international growth for the coming 12 to 18 months? Thanks.

George Feldenkreis

The international gross profit is higher than domestic, generally speaking. Some of the expenses are also higher than domestic. We are very enthused about international, and Canada is doing very well and we just hired a new General Manager for Canada, which will help propel our sales. We are doing very well in Mexico. We’re doing our operation in London is doing well. In Europe, we continue to it just actually in the beginning of our international expansion in most areas because we have been depending the past mostly of licensing, which is also doing much better as well as direct to consumer. So that segment has been a growing segment and it held the profitability of the company.


(Operator Instructions) We’ll go next to Ronald Bookbinder with Benchmark

Ronald Bookbinder - Benchmark

Good morning and congratulations on beating your plans again.

George Feldenkreis

Thank you.

Ronald Bookbinder - Benchmark

First, what was the Perry Ellis store comps for the quarter?

Anita Britt

Perry Ellis store comps they were up low single digit consistent with original Penguin. So overall comps were up 2.7%, we’re little bit stronger on the original Penguin side, little bit lower on the Perry Ellis side I think George actually gave them in his prepared comment.

Ronald Bookbinder - Benchmark

I thought that was -- okay.

George Feldenkreis

Ron the retail was Perry were 2.7 on a comp versus last year. Perry has been doing better this year than Penguin, Penguin initiated the changes in May. After May we’ve got much better. On the Perry side we were already had a higher platform that’s why the growth was 2.7%.

Ronald Bookbinder - Benchmark

And the reduction in the comps from Q1, was that just because of the traffic declines at U.S. shopping malls or anything else?

George Feldenkreis

We have been improving constantly. Number one, we have a better group managing this. I think that is number one, frankly. And number two we have been increasing the type of product and focusing on the type of product that the store need to have to increase sales. Traffic in the general has not been something to talk about.

Ronald Bookbinder - Benchmark

With the continued weak mall traffic trends, do you see increased allowances to department stores in the back half of the year, especially during holiday? Or do you think you know given that you have really tightened up the inventory and you are executing better on the designs that you are getting better sell-through, do you think that gross margins will continue to improve?

George Feldenkreis

Yes, in the latter half of year response so that’s the way that we’re looking at it is really turning our inventories much greater. We basically came out of the spring season today with much lower carryover inventory. Our AURs are up so we look at the fall and holiday season to continue improving our natural margins at retail as we continue to deliver superior outstanding product.

Ronald Bookbinder - Benchmark

And any color on the sell-through of any of the product lines as you transition to fall?

George Feldenkreis

Yes, we started you know, in New York, it has been -- the East Coast has been a little bit chilly, so we started to get some feedback and some of our fall woven and even some of our mix media knits have begun to perform well, our suite separate. We added brown as color to our assortment for the first time in many years and the color brown has been performing extremely well. So we’re starting to see some upticks in on some of our fall assortments that we just delivered most recently and we’re very encouraged because that could lead to additional revenues as we go into the second half of the year.

Ronald Bookbinder - Benchmark

Okay. And lastly, you mentioned reductions in women’s sportswear, while also seeing expansion of the Rafaella sportswear. Where are these reductions in women’s sportswear coming from, that from C&C, or is that private label?

George Feldenkreis

That’s predominately we’ve changed our focus on C&C, we have focused C&C to become much more casual. We have added an active wear component, which have had great results with customer. So we basically have changed the mix and blend of our women’s business as well as in the first of the year the dress business was just okay. We are seeing a bigger push towards evening dresses versus day dresses. So we’re seeing a shift in terms of what’s happening in the dress business with laundry. Rafaella is basically flat as a whole.

Ronald Bookbinder - Benchmark

Okay, great. Thank you and good luck in Q3.

George Feldenkreis

Thank you Ron.


We’ll go next to Robbie Ohmes with Bank of America Merrill Lynch.

Robbie Ohmes - Bank of America Merrill Lynch

I had just, Oscar, a few follow-up questions. Could you just -- the women’s sportswear pad in general, could you just sort of give us your from I guess the Rafaella perspective being involved there, it has been tough for a lot of your customers. What’s the sort of view on that overall category for fall holiday this year from your perspective? And then the other I just wanted to get clarification I think on the last question. So Anita, I think you said July, you saw back half kind of pickup in the month of July on the traffic trends so how has August been relative to the back half of July? And I may have one more after that. Thanks.

Anita Britt

I’ll give you the direction in terms of traffic trend. So, we did see the second half of July pick up and I do want to note too that in June, in terms of our overall perspective of the business one of our direct-to-consumer call out was I take the point to events with the world cup going on, there was a lot that actually impacted a lot of the outlet and spring comp traffic quite a bit. So, I do think to that impacted just overall consumer traffic as we did see both Perry and Original Penguin strengthen when we move into July. So I think that was an item as well just to call out. Moving into September, I would say from a traffic perspective when we’re looking at both street and outlets, outlets being like they have improved a bit, street traffic still seems a little bit weak with that said, I think that our direct-to-consumer group is doing a very good job, grabbing the customer when they worked and doing a great job of converting them. So, as George talk about, there is still a lot of room to go there in terms of the merchandise assortment and the doors operational execution in the doors but in a fairly short period of time they’ve been able to do a nice job in lifting the overall sales and a profitability in those last couple of months.

Oscar Feldenkreis

Robbie, in terms of the women’s space in general, you’re seeing success in for example as I mentioned women’s evening dresses are doing well, the whole active inspiration is doing extremely well and you’re seeing a lot of women gravitating towards that. The Denim business, when it comes to pure fashion Denim has a definitely slowdown you’re seeing a lot of momentum in leggings as a way of dressing and has become much more important into future. We’re seeing some trends, probably not enough trends out there today. Contemporary continues to do well and really it’s being led by different constant changes of silhouettes and adding differentiating product which is really what resonates with the women today and creating a necessity to replenish her wardrobe or adding to her wardrobe.

Robbie Ohmes - Bank of America Merrill Lynch

Got it. That is really helpful, Oscar. And then one last question. Oscar, could you sort of frame the sort of three to five year international growth plan for your Company and help us understand where and sort of what the big drivers of taking international up as a percent of sales are going to be?

Oscar Feldenkreis

The international for us is really and specially on the European side is to continuing taking over additional brands that we sell today in the United States as we done already with our golf platform adding now Callaway, adding Ben Hogan to develop a relationship with Walmart Europe as well as expanding our Original Penguin business not only from a retail perspective but also adding additional outlet businesses with us, my father mentioned on with Coin in Italy as well as developing a stronger base with El Corte Inglés in Spain opening up Germany other territory.

So, our focus is definitely to continuing spending in Europe and making Europe a bigger or international as a whole bigger piece of our business where I feel that we’ve had, now that we have the right team in place, we’ve the right people to be able to execute on that and as well as Canada has been a strong momentum hiring this the new General Manager for Canada I think I going to make us even more important. We are taking some of our brands there that we haven’t been able to fund the right channel of distribution or the right partners, I just came back from the magic show in Las Vegas and we had a very very good show not only on the domestic basis but also on an international.

And as well as expanding on into other territories like even in India, where our licensing has done an incredible job in looking for partners there to enhance our brands and our lifestyle.

Robbie Ohmes - Bank of America Merrill Lynch

Great, thanks very much.

Oscar Feldenkreis

Thank you, Robbie.


Ladies and gentlemen that will conclude our question-and-answer session. I’ll turn it back to management for closing remarks.

George Feldenkreis

Thank you very much, as you’re all aware apparel companies are operating in a very challenging environment. We continue to execute on our plan to increase our share of retail and especially international presence and incurs the profitability of our wholesale business as Oscar explained. At the same time we’re focusing on lowering expenses and lowering the cost of good to improve gross profit. And we continue to come up with new initiatives, idea, better design, innovation and comparative pricing for our wholesale brands. The strength of our brands continue to, we continue to fuel our growth in the future. We’re confident that well-known and respected brand will continue to resonate with the consumer. Good business is based on long range projections and innovation.

This is particularly true with consumer brand businesses especially in apparel. Consumer brand need long-term strategies and visions to remain viable, processed by the consumer and we are committed to doing that.

As Anita explained, we have finished this quarter in the strongest financial position than we have ever been. We have a record amount cash and marketable securities as of August 2nd and have not currently grown on our revolver. Our debt today is only 22% of our total assets. We’re very proud of what we have accomplished during the 21 years span of operating as a public company. We have assembled again group of brands all of which are run by a very competent dynamic manager and supported by a group of dedicated and hardworking associates.

We continue to count on them to continue growing your company through an unprecedented and turbulent retail environment. And we thank our shareholders for their patience and understanding for this period. Have a great day.


Ladies and gentlemen, thank you for your participation. This does conclude today’s conference.

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