Elizabeth Arden's (RDEN) CEO Scott Beattie on Q2 2016 Results - Earnings Call Transcript

| About: Elizabeth Arden, (RDEN)

Elizabeth Arden, Inc. (NASDAQ:RDEN)

Q2 2016 Earnings Conference Call

February 04, 2016 04:30 PM ET

Executives

Allison Malkin - ICR

Scott Beattie - Chairman and CEO

Rod Little - EVP and CFO

Marcey Becker - SVP of Finance

Analysts

Joe Lachky - Wells Fargo Securities

Jason Gere - KeyBanc Capital Markets

Linda Bolton Weiser - B. Riley & Co.

William Reuter - Bank of America

Carla Casella - JPMorgan

Kevin Zeese - Citigroup

Grant Jordan - Wells Fargo

Operator

Greetings and welcome to the Elizabeth Arden Second Quarter Fiscal 2016 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.

It is now my pleasure to introduce your host, Ms. Allison Malkin of ICR. Thank you, Ms. Malkin, you may begin.

Allison Malkin

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 these are prepared remarks or in response to your questions, may contain forward-looking statements that are made pursuant to the Safe Harbor Provision 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 10K 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, operator, and welcome, everyone, to our fiscal '16 second-quarter conference call. Joining me today are Rod Little, our Executive Vice President and Chief Financial Officer and Marcey Becker our Senior Vice President of Finance.

In terms of the agenda today, I will provide a brief overview of our Q2 and year-to-date business performance and the key priorities driving our fiscal '16 and forward business plans. I will then introduce Rod Little, our CFO, who will provide a more detailed review of our operating performance, financial metrics, as well as a detailed update of our performance against our key strategic priorities.

In terms of an overview of Q2 performance, I'll comment on our performance as it relates to our most important corporate priorities and Rod will then go into more detail in his prepared remarks.

As I have detailed on prior calls, our key corporate priorities are to accelerate the global growth of the Elizabeth Arden brand, accelerate the growth of our key pillar fragrance brands, to improve our gross margin and operating margin through a more efficient go- to-market capability and an optimized cost structure, and to attract and retain and develop the strongest employee talent to execute against our three-year business turnaround.

We continue to execute as planned against these key priorities in driving sustainable and profitable growth. The investments we have made in our key pillar brands to drive growth are resulting in stronger performance of these strategic brands.

There was broad-based growth of the Elizabeth Arden brand across most markets, increasing by 1% on a constant currency basis for the quarter and 3% year to date. Most importantly, the investments we have made are driving improved retail sales performance.

JuE Wong, our new president of the Elizabeth Arden brand who joined us in September of 2015 has already made a significant impact in terms of our ability to provide global leadership on product innovation and marketing effectiveness, as well as expanding prestige distribution for the Elizabeth Arden brand.

Our key fragrance brands are also performing as planned, with the fragrance brands of Varvatos, Juicy Couture, Elizabeth Taylor and Curve, all up fiscal year-to-date.

The North American fragrance business continues to be impacted by the celebrity fragrance category and declines as well as our retailers' focus on fewer promotional sets this holiday season, as we both have been focused on basic sell-through and basic sales with better margins. Our sell-through rates increased significantly as we work with our retailers to improve the quality of the assortment.

This sell-through improvement has been recognized by our retail partners, which sets us up well for next holiday season. This also, importantly, has resulted in very healthy retail inventories as we move into the third quarter and we are currently experiencing solid replenishment as we enter the second half of the fiscal year.

The momentum in our international markets continues with broad-based strength. Rod will highlight the specific details of our international performance as well as leadership and capability upgrades we're making to the business.

He'll also provide additional perspective around gross margin and cost progress that we are tracking well on both fronts with performance in line or ahead of our internal plan.

As we enter the second half of fiscal '16, I'm confident that our operational cost transformation is tracking well and continued to contribute to gross margin and EBITDA margin improvement. The key focus of the organization now is pivoting to accelerating revenue growth in priority brands in priority markets.

We expect to fill the role of President Global Fragrances this quarter, which will complete the transformation to our brand-led organization and will lead to growth of our fragrance portfolio globally.

I would now like introduce Rod Little, our CFO.

Rod Little

Thank you, Scott, and good afternoon, everyone. We continue to execute our strategy with the intent of building back healthy and more profitable sales growth. The Elizabeth Arden brand in international segment posted growth on a constant dollar basis for the fourth consecutive quarter.

Our non-Arden fragrance portfolio performed very close to plan with an overall decline in net sales due to fragrance category softness in North America mass as described by Scott. While gross margin was 50 basis points below a year ago in the quarter, first half gross margin increased by 60 basis points versus the prior period on an adjusted basis, more than offsetting significant foreign-exchange headwinds.

Our overhead cost reductions remain ahead of plan as we realized better-than-expected savings from our cost reduction programs. Lastly, we continued to generate good cash flow with first half performance well ahead of plan.

And now a brief update on the five key strategic priorities which remain unchanged. Priority one: drive the Elizabeth Arden brand. Net sales of the Arden brand were up 1% in the quarter and 3% fiscal year to date at constant foreign-exchange with increases in both skincare and fragrances. The growth was broad-based with the Elizabeth Arden brand net sales up 9% in international, with growth in China, Asia-Pacific, Europe and the Middle East.

As we mentioned in the press release, our latest innovation, SUPERSTART skin renewal booster, is ahead of plan in most markets and driving retail sales trend improvement. We're also seeing strong performance for the Elizabeth Arden fragrances with both Red Door and Fifth Avenue up for the quarter and year-to-date on the back of the recently launched Elizabeth Arden Always Red.

The improvement in retail sales performance we're seeing across the skincare portfolio in particular gives us confidence that the innovation and new brand campaign are positively impacting our results.

Priority number two: grow key pillar fragrance brands. As for our non-Arden branded fragrance portfolio, the negative impact from celebrity fragrances is diminishing, but still impacting our overall results, which were down 8% in the quarter and 4% fiscal year to date at constant foreign exchange. Designer portfolio is tracking the plan, down slightly for the quarter, but up 7% in the first half at constant rate.

The John Varvatos fragrance brand posted another quarter of double-digit net sales increase, up 32% as a result of a strong pipeline of new innovation that rolled out last quarter. Curve and White Diamonds also continue to perform well in the important US mass segment with net sales increasing on both brands this quarter and in the first half.

Priority number three: improve go-to-market capability and execution. We continue to see the positive results of the significant changes implemented last year to improve our global distribution and selling capabilities, as evidenced by the international segment posting its fourth consecutive growth quarter.

Stepping back for a moment to look at everything we have done to improve our global capabilities and execution, the changes are significant. First, we are now fully operational with two high quality joint venture partners in the Middle East and Southeast Asia and we are happy with the startups and expect both of these entities to exceed budgeted performance this year and be growth accelerators as we move forward.

Second, we have simplified our global footprint by converting Italy, Brazil, and Puerto Rico to third-party distributor models, which not only eliminates significant complexity, but we also expect to be able to grow faster in these markets in our new structure.

Third, we've upgraded our leadership capability across the board with the final pieces now in place with new, highly capable and proven leaders in place for the Latin America and Asia regions, as well as the important Chinese market.

We're confident that these new leaders, along with better overall business and innovation plans, will drive solid future growth in these regions.

Finally, this leaves the Europe, Middle East and Africa regions where net sales were up 9% in the first half. Europe was the initial priority in our go-to-market capability improvement efforts and we're now seeing the payoff, with nearly every market showing constant rate net sales growth in the first half.

The UK, Spain, Germany, France, South Africa, and the Middle East are all growing, with Germany leading the way at plus-44%. Specifically in Germany, the growth is across both the Elizabeth Arden brand where we are seeing significant gains in prestige distribution and fragrances where the new Jennifer Aniston fragrance is a top 10 launch.

Priority number four: optimize costs and reduce complexity to drive margins. We remain focused on simplifying our business model and directing our resources to the priority brands and markets. Our gross margin improvement, fiscal year to date, is in line with expectations, despite negative foreign exchange, and we expect to see continued improvement versus the prior-year periods as we move forward.

We are ahead of plan on our indirect overhead spending objectives and we remain on track to over deliver the high end of our targeted cost savings range, estimating we will deliver $47 million to $50 million in annualized savings by the end of this fiscal year.

Finally, priority five: attract, retain and develop strong employee talent. We continue to have low attrition rates overall, with little to no regretted losses despite what has been a difficult operating environment.

This is attributable to consistency in our strategy and choices, delivering our internal objectives in the first half, and seeing many improvements, not only in business trends but also better processes and execution.

Finally, as referenced within the go-to-market capability priority, we've also had success in attracting proven top talent to some of our key leadership positions, with these new additions recognizing the opportunity of our brand portfolio.

Our multi-year operational objectives, as laid out in these calls the past two quarters, have not changed. I will not repeat them again here, but we remain focused on delivering consistent net sales growth and margin improvement going forward, remaining very tight on indirect overhead costs and fueling our priority brands and markets will continue to be the formula for how we will deliver our objectives.

For fiscal '16 we expect to continue to see improved overall financial performance with no change in outlook versus what we provided last quarter, other than for foreign-exchange impact, specifically, net sales growth at constant foreign exchange rates, driven by continued growth in international and the Elizabeth Arden brand.

A negative impact on net sales from foreign currency translation of approximately 3.75% which is higher than the 3% estimated in November; gross margin expansion driven by lower dilution rates, improved channel and product mix and operational cost savings; lower indirect overhead spending, including targeted reinvestment to drive future growth; and finally improved EBITDA margins behind gross margin expansion and the realization of cost restructuring savings.

Now for a brief discussion of our results for the quarter. On an adjusted basis, gross margin decreased by 50 basis points for the quarter. This is largely due to negative impact from foreign exchange of 45 basis points.

The remainder of the decrease was due to discounts and allowances in customer mix, where we had a higher proportion of sales volume moving through distributor versus our own sales force with the distributors receiving a higher percentage of sales discount.

As I mentioned earlier, recurring indirect SG&A overhead expenses continue to track lower as compared to the second quarter of the prior fiscal year, driven by our cost restructuring program, including lower overheads and tight cost control and favorable FX rates. For the quarter, total indirect expenses declined by 12% or by 9% at constant rates, and by 120 basis points as a percentage of net sales.

Now turning to the balance sheet, we ended the quarter with $26.7 million outstanding on the credit facility, as compared to $58.9 million in the prior fiscal year. And we have borrowing availability of $167 million. Accounts receivable DSO improved from 67 days to 54 days, and we ended the quarter with inventory of $221 million.

We expect fiscal year-end inventory levels to approximate or be just below prior fiscal year-end levels. Capital expenditures totaled $5.8 million year to date and we now expect CapEx for fiscal '16 to be in the range of $15 million to $20 million.

With that, I'll turn the call back to Scott.

Scott Beattie

Thank you, Rod. Operator, we would be happy to answer questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first question comes from the line of Joe Lachky with Wells Fargo Securities. Please proceed with your question.

Joe Lachky

Hi. So, I guess, the tone that I get from you is that it's fairly optimistic, maybe, and I'm trying to bridge that with kind of our expectations versus your expectations, right? so, according to you, you hit your internal projections, and you obviously missed street estimates pretty significantly.

So I'm just trying to get an idea of what internally you're projecting here. I guess, going forward, do you plan on it getting worse or have we hit the low point here?

Scott Beattie

We specifically, going back a year and a half ago, didn't provide guidance. We have put a three-year plan together in terms of our key priorities and I think Rod and I both articulated those clearly. I think we provided a layout in terms of broad operating guidance that we reiterated today in our call and in the press release.

We are seeing a significant improvement in the execution and operation of our Business, though, and I think your assessment that we're optimistic is right. Clearly the celebrity fragrance category and the weakness in that category has been a real crippler for us the past couple of years.

But all of the initiatives that we've put our shoulder behind in terms of the transformation of our business model, the transformation of our cost structure, the reinvestment in our core strategies, and I won't reiterate them because I think both Rod and I focused on these - we're seeing good solid traction against those initiatives.

And they will take time. This is a very weak global economy that we're living in and there is - many of our competitors are experiencing some of the softness on the top line that we've experienced, particularly in fragrance.

But we are very confident that we are on the right track, that we're seeing the improvement in operating improvement that we expect and we expect the business to consistently improve, as Rod outlined.

Joe Lachky

Okay. So I guess given that the plans - the longer term plans were put into place 18 months ago, and obviously the macro environment isn't very favorable for you here. And it's obviously deteriorated, especially in mass fragrance for you over those 18 months.

And do you at this point take a step back and perhaps need to implement additional cost cutting or restructuring? What are your thoughts around that?

Scott Beattie

Well, it's an ongoing process. We laid out the plan that we laid out when we articulated in August. And as Rod said, we're performing above where that run rate is, but that doesn't mean that we stop there.

We're going to continue to look for ways to optimize our business, including looking for ways to neutralize some of the impact on foreign-exchange, both through our sales line as well as through our cost of goods and our operating expenses.

So it's an ongoing process and I think we've embedded in the culture of the organization. And Rod's leading that charge with a lot of resources around it. So that will continue to be a key component of how we drive improvement in EBITDA margin.

Rod Little

Joe, I would just add, from a macro environment, while it's not great in total in fragrance, I think you've seen that from a few of our competitors as well in the recent quarters. Overall there are some improvements out there. The US beauty prestige category in the US is actually fairly robust and growing. We had it up 7% in the first half.

The European markets are relatively stable and you heard us talk about growth ahead of the market average. And then as we look at our plans in Asia and what we're doing in China and the changes we're making in Latin America, even if the market's not fantastic in those geographies.

We feel like we have plans where there's a lot of runway for growth regardless of what the market's doing. So that really leaves at the end of the day the big US mass-market that we have exposure to.

And you're right, that market's been down. We had it down 5% in the first half as a category. It was down less than basic. Scott referenced the promotional buy being lower. But it was all around improving profitability in the category and having higher sell-through in a more sustainable category, which we're helping plan.

And we think that also bodes well for the future as we look towards next holiday and beyond. And the celebrity category for us is now down in the 4%, 4.5% range from a portfolio exposure, so that continues to decline as we change the mix of the portfolio.

Joe Lachky

And what's your exposure to mass fragrance in general overall? Sorry. And then my last question, I guess, on the Elizabeth Arden brand, you had growth of 1% globally. And I think you said it was plus-9% internationally, correct me if I'm wrong, which would imply that it was down in North America.

That would be driven by fragrance. And, again, I could be wrong, because I may have missed something in your prepared remarks. But looking forward for the Elizabeth Arden brand, how do you view the sustainability of sales here going forward now that you're starting to lap some positive comps?

And maybe if you could just give some insight into retail sales trends that you're seeing either in the US or globally? Thanks. I'm done.

Scott Beattie

Just to clarify the Elizabeth Arden brand performance, on a constant currency basis we are up 3% globally year to date. And we see that improvement continuing and accelerating for many of the reasons that Rod outlined. Many of the markets where we've gone through a transition in our go-to-market strategy and we've changed leadership and priority in the markets, we're now starting to see positive growth.

I would say China is one of those. We were up 18% this quarter in China. Obviously, we have a long way to go to accelerate that business forward, but we're going in the right direction as opposed to the last few years where we've seen a decline in that business.

So, the Arden brand, and particularly Arden brand internationally, is going very well. As I mentioned, JuE Wong, who is the new President and leads the brand organization around Arden, has been with us for about a quarter.

And she's made an impact in terms of focusing the team in innovation and marketing and implementing new digital marketing platforms around Arden and we expect that to continue to accelerate the growth of the Arden brand.

Rod Little

Just cleaning up a couple of the other points, our exposure to US mass is approximately 15% of our global sales. And specifically in the US, the Arden brand was down, North America now, so inclusive of Canada, down 7.5% constant in the first half with all three categories down.

Scott Beattie

And that really was driven by some distribution choices in the Arden brand.

Rod Little

And on plan.

Scott Beattie

And on plan.

Operator

Okay. Our next question comes from the line of Jason Gere with KeyBanc Capital Markets. Please proceed with your question.

Jason Gere

Okay. Thanks, good afternoon. I'll continue on some of the line of thinking, maybe a different angle. I understand the cost cutting is an ongoing process. Is it fair to say that the advertising or the step-up in the marketing spend or investments may continue to grow faster than maybe some of the cost cutting that can be realized?

I'm trying to continue Joe's line of thinking, just in terms of the investments that you're making and the ability with the changes in the organizational structure to fund them internally without impacting some of the margins?

Scott Beattie

Well, I would say that we have a very sharp pencil in terms of the investment on our priority brands, by brand, by market. And, obviously, the key to our successful turnaround, both in terms of improved profitability and improved performance of our key pillar brands, will be revenue growth and ranking and market share.

So, obviously, we are committed to reinvesting against our top opportunities. That said, I think - and Rod can address this, we've got better discipline around return on investment and specific initiatives around reinvestment behind our brand portfolio.

Rod Little

And, Jason, we are up 100 basis points in the first half on our direct spend support for the key brands, primarily behind Arden, Varvatos, Juicy, Curve and White Diamonds. Those were the priority brands.

That can change and fluctuate from quarter to quarter, depending on how we roll out new innovation and the support that goes with it, but we do expect the direct spend to continue to be up on a percentage basis across the balance of the fiscal year.

And we'll look at that very closely. We're doing it now as we plan the budgets for fiscal '17. We're looking at where the spending is working and driving growth and getting a return where we're not and we'll adjust that as we go forward into fiscal '17. So that is still open in terms of how that relationship will look beyond this fiscal year.

Jason Gere

And if I may add on to that point, when you think about the outlook you're looking for constant sales to continue to grow, as well as the EBITDA margin. But is there a priority of one of the other if, just given the macros, I think, can be a bigger issue going forward.

So, I'm just wondering if you are starting to see that the sales need more investments, will you be willing to eat into margin? I'm just trying to think, like right now what we've been hearing from a lot of companies out there is that it's trying to find a balancing act.

I'm just wondering if there's a priority? Is it really getting the Arden brand growing faster than EBITDA? I'm wondering if you could provide a little bit of context to that?

Scott Beattie

The Arden brand is our most profitable brand from a gross margin perspective and from a direct contribution perspective. So obviously - and it's also our largest brand, as you know. Obviously, growth in that brand drives improvement in gross margin and improvement in EBITDA margin.

Now, just like the competitors you referenced, it's a balancing act between what it takes to drive growth and what that rate of growth is. And what we're monitoring and managing extremely closely is that direct fuel money that Rod references by market by brand, so that we're allocating the fuel to the largest markets, the key priority markets around the key priority brand.

Jason Gere

That's good. And then a different topic. I know you are constantly doing a brand review, especially on the fragrance side. I'm just wondering - we heard from Coty this morning and obviously they continue to look through that portfolio in anticipation of integrating with P&G's beauty business.

I'm just wondering how you look at the portfolio now on the fragrance side? And is there more wood to chop here in terms of having the right brands in the portfolio, rather than too many brands that are just not carrying its own weight?

Scott Beattie

Absolutely, and we do that. We look at that continually and certain of our brands are managed per cash flow and are sold in channels of distribution based on price points and profitability.

And brands that we don't see a future in, we either don't renew the license, or we slowly phase out if they are brands that we don't see are meaningful enough or have enough potential for future growth. So there's always those decisions that are being made.

Jason Gere

The last question and maybe to provide a little levity here, I was just wondering if you could talk on the celebrity side. I know you're trying to get less exposure here, but I was just wondering, couple of your artists - you had Taylor Swift and now Justin Bieber looks like he's a born-again artist. Do they come back to you and say let's partner up again?

How do you deal with that in terms of his popularity is rising again? Is this something where it makes sense to do more fragrances, or do you think that can help reaccelerate that celebrity market, or is this something that you just don't want to take that incremental risk at this point?

Scott Beattie

I would rather than comment on any one celebrity, because I think it's unfair. Each one has their own business and their own opportunity and circumstances and their own passion about the category.

But the celebrity element in the beauty category is not going away. It's morphing into different forms. You see it with brand ambassadors. You see it utilizing celebrity through digital media and social media.

And so this is an area that we've got a track record of being good at and we're examining it. We're examining the use of celebrity across the brands, as well as the opportunity of launching new celebrities around the world.

And we'll just do it in a way that's reflective of the current environment. Celebrity is still a really critical component of how beauty products are aspired to in the global economy.

Jason Gere

Okay. Great. Thanks for answering all my questions.

Operator

Our next question comes from the line of Linda Bolton Weiser with B. Riley & Co. Please proceed with your question.

Linda Bolton Weiser

Hi, so it sounds like, you mentioned one of the impacts on growth margin was switching to the distributor, and take some out of the gross margin. But an offset is that you've reduced your overhead SG&A value, reducing your infrastructure.

So, net net, is it a positive effect on your EBITDA margins who have done the shifting to the distributors?

Rod Little

Yes, Linda, thank you for the question. In this case, it wasn't driven by a macro shift to distributors away from our own affiliate sales forces. It just happened to be a couple of programs we had in the quarter in a couple of markets. We chose to go via distributor from an efficiency standpoint as opposed to direct.

It's not a macro trend and we do believe on the big distribution relationships that we've set up that they are equally as profitable, if not more, than what we had as an affiliate structure that it replaced.

Linda Bolton Weiser

Okay. So when we hear you talking about converting more markets to distributors, I think you mentioned Brazil and a few others, then we shouldn't assume that correlates to an impact on margins?

Rod Little

No, Linda. Specifically in this case, it's more - you should think of it as customer mix around how we executed some of the promotional elements in quarter two in just a couple of markets, nothing structural.

Linda Bolton Weiser

Okay. Got you. Then, in terms of the mass retail, you know one thing Coty said this morning was that they actually think - they were distinguishing less between designer and celebrity and more with the channel. They really feel there's a structural issue with how the mass retail has merchandised fragrance.

And I'd be interested in your opinion on that, and if there's any way you could, in some way, work more closely with the retailers to improve the merchandising, to improve category growth.

Scott Beattie

I think that's a very, very valid observation, and we have the same experience, frankly, because we are operating in both prestige and mass. And one of the frustrations has been that the fragrance category in mass hasn't penetrated into that customer base like the color, the hair care, the color cosmetic category and even skincare.

And I do think there's a tremendous opportunity to do that. And I think that our mass retail partners are recognizing that. There is a couple of partners in that channel that have renewed their focus on beauty.

We have, specifically, Walgreen's Boots, who got a very strong experience with beauty and fragrances in their European business and see opportunities to improve merchandising and execution.

And I think we're seeing it in some of the others. So I absolutely do think that there's an opportunity there to improve, and some of the changes that we are making in terms of the leadership of our fragrance business and moving to that brand-led fragrance organization are addressing those opportunities.

Linda Bolton Weiser

Okay. All right. Thanks a lot.

Scott Beattie

Thank you.

Operator

Our next comes from the line of William Reuter with Bank of America. Please proceed with your question.

William Reuter

Good afternoon. I wanted to follow up a little bit on the gross margin being down and the commentary regarding the shift to distributors. Was this due - because I think the word discount was used. Were these discounts due to products that didn't sell as well as you or the distributors had hoped?

Scott Beattie

Just to be clear, as we stated and Rod stated in his narrative, as well as in the press release, the decline in gross margin for the quarter was approximately 50 basis points, of which 45 basis points was foreign exchange.

So the part that we're talking - the remaining part, the five basis points, was a very minor change in a couple of programs that we executed. So the primary driver of the gross margin and we feel that will be a temporary setback on gross margin. As we look forward, we see improvement in gross margin continuing, and we stated that in our overall outlook.

William Reuter

Okay. Obviously, the gross margin trends, at least in the last quarter, were for substantial improvement. And I feel like in general we've been moving towards more higher quality sales at better margins. So it was a little bit surprising that we didn't see that continuing in this quarter. Did you have any comments toward that?

Scott Beattie

No, it was right. It was really foreign currency that was the primary driver of that, but we expect in the second half to see an acceleration in gross margin in our Business and get back on track.

Rod Little

Bill, if you look at it, your point is absolutely right. The two prior quarters, so the fourth quarter of 2015 and the first quarter of this fiscal year, we did have gross margin growth up in the 200 basis point range versus the prior period. This is a bit of an outlier, frankly, in terms of how some things profile versus the base.

And echoing what Scott said, going forward we feel like you'll see that move back up more to the trends that we had before. It's not so much about anything fundamentally changing in the business, or our view of gross margin being different going forward.

William Reuter

Okay. And then your non-celebrity fragrances were down and this was also a change from what we've seen recently. You did call out Varvatos as having done well, but can you talk a little bit more about why some of those may have lost a little bit of their momentum?

Rod Little

Yes, so it was down, Bill, just a little bit in the quarter, low single digits, 1%, 2%. The brand I'll call out in there that underperformed versus plan and versus the prior period, is Britney Spears. We don't put her in the young celebrity camp.

She's where Elizabeth Taylor, White Diamonds sits, in that heritage fragrance, as we bucket it, because that's the way her brand has behaved over the past few years.

And in her case in particular, we've had some issues in Latin America and Brazil beyond foreign-exchange. The demand has just dried up down there. And she's the number one female fragrance brand in that market. And so when partners stop buying in that region, it has a significant impact on us.

Scott Beattie

Yes, I would clarify that the demand for her fragrance hasn't dried up, but the fact that the economy in Brazil, it's the number one female fragrance in Brazil and it got backed up in terms of inventory. It has taken some time to sell that inventory through.

And so there's the consumer demand and then there's the backup in the system that doesn't generate orders on our behalf, so that's got to normalize based on the current economic conditions in that market. And as Rod said, that is a big piece of the decline in fragrance. But that should normalize at a lower level and we're certainly focused with our distributor to continue to sell that brand.

Rod Little

And we actually have plans that we're optimistic about, much to Jason's point earlier on celebrities reinventing themselves. She has reinvented herself and we are reinventing with her, and we will have new innovation coming and investment back in that brand that we're confident will reverse the trend in the summer timing.

William Reuter

Okay. And lastly for me, you have talked about your model and how performance was relative to your model. Do you feel good about liquidity of your Business over the next handful of years if you continue to report results that are in line with your expectations?

Marcey Becker

Hey, Will, it's Marcey. Yes, we do. We certainly have sufficient liquidity to - as we look to our multiyear plan. Clearly if there is an acquisition, depending on the size, we may need external capital. But certainly for the working capital needs of the business we have sufficient liquidity.

William Reuter

That's all for me. Thank you.

Operator

Our next question comes from the line of Carla Casella with JPMorgan. Please proceed with your question.

Carla Casella

Hi. Just as a follow-up, you mentioned about Britney Spears in Latin America. When we look at some of those international markets, or in that Latin America, when should we see that normalize? You mentioned you expect that to normalize. Is that something that could take a year?

Scott Beattie

No, we're a year into it. Frankly, I think you will start seeing it - it's not a strong fragrance market in the second half here in many of those, so as we get into fourth quarter and as we go into next year, that'll be resolved.

Carla Casella

So the international markets do follow the same trend as the US, where this holiday quarter is the most important quarter and the rest of the year is a much smaller fragrance market?

Scott Beattie

It's probably not as acute as our US business, just because the holiday quarter, particularly in our mass fragrance business is a very sharp increase over and above the normal. The rest of the global distribution in fragrance in the prestige distribution, you do have a bump up at the Christmas period. But it's not quite as acute as it is in the US mass business.

Rod Little

And, Carla, you have to remember, roughly 80% of our international portfolio is the Arden brand, which is more of a stable non-seasonal brand, specifically skincare and color cosmetics.

Carla Casella

Okay. Great. And then the $47 million to $50 million of cost savings, what are the big items that are left to achieve those? And will that mostly come through gross profit, or SG&A, or can you give us a sense of how much comes through each?

Rod Little

So it's all done. There's nothing left to be executed. The bulk of it comes through SG&A on the indirect line. In terms of the plans we have this year, I would say roughly 10% to 15% - 15% of the plan for this year is gross margin, gross profit-related. The balance is SG&A.

Scott Beattie

In terms of reaching that target, as I mentioned earlier, we're done. The initiatives are in place and we are tracking at or above those targets. But Rod has been instrumental in setting a culture of continual efficiency savings and on a continual improvement, so it's not a - against that target we're done, but we're going to continue to optimize our business model.

Carla Casella

Okay. We've been hearing from a lot of retailers that holiday - the weather, traffic has been mixed. How is the inventory level at department store in mass, and do you anticipate having to take any returns as you go into the coming quarter?

Scott Beattie

No, it's actually quite good. I mean, as we mentioned in our prepared remarks, particularly our mass retailers bought down their promotional buy this year and focused more on the basic planogram items and some other promotions that we put in place. And we actually had a significant improvement in sell-through on their promotions this year and improved profitability, both for the retailers and ourselves. So as we've entered the third quarter, we're seeing pretty solid replenishment; no real overhang in inventory in any of our retailers right now.

Rod Little

And, Carla, I'll just give you one data point that will help tie it all up. We have accrual positions on the books that we budget for in line with normal return patterns, and we're kind of through that return period now, coming back from the retailers, and we're favorable versus what we had accrued for going into holiday.

Carla Casella

Okay, great. And then one last one, any comments or trend - diversion, any trends there?

Scott Beattie

I would say that our whole industry is becoming much more disciplined in terms of - I think you probably heard from competitors in their discussion around this that much more disciplined distribution, much more disciplined in terms of managing gross to net dilution.

And although the US dollar is so strong vis-à-vis the rest of the world, there is a natural tendency of product to show up on our shores through diversion. I think all the industry understands that risk and is making a strong effort to control it.

Carla Casella

Okay. Great. Thank you.

Operator

Our next question comes from the line of Kevin Zeese with Citigroup. Please proceed with your question.

Kevin Zeese

Hi, thanks for taking my question. I was just curious about the mass business. I understand you talked about some of the structural issues that may be going on there. But is there an opportunity to capture that customer where they're going that you're maybe not fully realizing right now?

Scott Beattie

I don't understand the question in terms of where they're going.

Kevin Zeese

Well, assuming they're still shopping for fragrances, but it may be in channels where you're less represented.

Scott Beattie

No, I think in terms of the US market specifically, we're well represented across all those channels, including some of the emerging channels. There's always opportunity to penetrate digital platforms with our retail partners particularly, like Walmart.com and Target.com and Macys.com and so on.

These are high, high priorities with our traditional retail partners and we're finding new and exciting ways to animate our products on those platforms. But I don't think that, as it pertains to the US market, that we're missing emerging channels of distribution around fragrance.

Kevin Zeese

Okay, so not in Sephoras or Ultas or…

Scott Beattie

Well, we're one of the largest suppliers to Ulta. Sephora has reduced its fragrance shelf space somewhat and we have some of our brands in those doors, but not all our brands are appropriate for Sephora distribution.

Kevin Zeese

That's helpful. And you mentioned about - in passing, about acquisitions that you would need capital. Have you had conversations with [Roan] or others about how you would get that capital?

How much of a priority is it to add on brands here, either through acquisitions or is there ability to maybe capture some unit that may be lost in the Coty P&G relationship even without a capital infusion?

Scott Beattie

I think Marcey answered that. I think it's a matter of degree. And certainly if we're looking to increase our volume significantly through acquisition, that would require financing and Roan's investment in the Company and their strategic intent is to support us in attractive opportunities.

I would answer it a different way. The key for us to return to the levels of profitability that we had in fiscal '12 and '13 is to regain the volume that we've lost in the celebrity category.

And adding another couple of hundred million of volume to our Business, particularly given the rationalized business platform that we have, both from a cost and execution point of view, would be extremely accretive to our Business.

And so our focus, as I mentioned in my remarks, is really now to pivot towards revenue growth. And that revenue growth comes from driving accelerated growth in our key priority brand. It comes from new licenses, new opportunities that we're pursuing. And it also comes from acquisition.

And so we're clearly focused on all of those drivers of growth to regain the levels of profitability that we had previously. And frankly, I think the bar will be much more sustainable profitability and healthier growth.

Kevin Zeese

Okay, that's helpful. My last question is just a follow-up on the gross margin discussion. I'm trying to think about the back half of the year and what you called out FX and you called out the small issue in the distributor markets and how that may take some time to improve.

I'm curious what pivots year-over-year, either in terms of the trends of the business, or maybe easier year-over-year comparison?

Rod Little

In the back half, Kevin, the foreign exchange really starts to abate. And the negatives we've had on foreign exchange over the past four quarters, that starts to go away and so that's a drag. We'll have a little bit in Quarter Three and Quarter Four will be more on an equal basis, I'll say. And then the distributor thing is not a big deal.

I think that was more of a one quarter profiling issue. And as Scott rightly pointed out, it was five basis points of differential that we're explaining. Again, we are very focused on investing in the brands that have growth potential and gross margin accretion.

And so as we continue to execute our plans and we have disproportionate growth in international on the Arden brand with skincare as the priority, that becomes accretive, as well.

And so there's a lot of things that go into it. But those are two things that will give us a little wind in our sails in the back half.

Kevin Zeese

Do you think the accrual issue you talked about on returns might also be helpful or…

Rod Little

It doesn't hurt, but I wouldn't say it's a material reconciling item. It is not.

Kevin Zeese

All right, great. Thanks for taking the questions again.

Operator

Our final question comes from the line of Grant Jordan with Wells Fargo. Please proceed with your question.

Grant Jordan

Great. Thanks for taking the questions. To follow up on liquidity a bit from earlier, it looks like working capital has really been a significant driver of helping you maintain a pretty healthy level of liquidity. At what point do you think working capital will stop being such a benefit to your cash?

Marcey Becker

Well, I think we didn't comment on this call or previous calls. Last year inventory was a big driver of that working capital source. We expect, as Rod said, inventory to be neutral to a slight source of cash this year, and so not as big a driver, and that going forward the bigger drivers will be some on working capital, but more on the earnings.

Grant Jordan

So with working capital down 20%-plus, in Q2, do you think it will go back the other way over the course of the Q3 and Q4, it sounds like?

Marcey Becker

Well, I don't want to comment specifically on that. I'll go back to the comments we made about what we had said earlier about the full year working capital, the comments we made on the full-year working capital component.

Grant Jordan

Okay. How much was drawn on the revolver at the end of Q2?

Marcey Becker

We had $1.7 million on the revolver, plus $25 million outstanding on the second lien.

Grant Jordan

Okay.

Rod Little

And we had cash on the balance sheet, as well.

Marcey Becker

Yes, we had cash on the balance sheet, as well, of $55 million of cash on the balance sheet.

Rod Little

So net we had a positive cash position of about $25 million.

Grant Jordan

Great. That's all I had.

Operator

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

Scott Beattie

Thank you, operator, and thanks, everyone, for joining us on the call.

Operator

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

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