Wilsons The Leather Experts F2Q07 (Qtr End 8/4/07) Earnings Call Transcript

TRANSCRIPT SPONSOR

Wilsons Leather (WLSN)
F2Q07 Earnings Call
August 21, 2007 4:30 PM ET

Executives

Michael M. Searles - Chief Executive Officer
Stacy A. Kruse - Chief Financial Officer and Treasurer
Michael T. Sweeney - Chairman of the Board, Wilsons Leather Managing Partner, Goldner Hawn Private Equity

Analysts

Shaun Smolarz – Sidoti and Company, LLC
Eric Beder – Brean Murray & Co., Inc
Bill Armstrong - CL King & Associates

Operator

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to Wilsons The Leather Experts Incorporated Second Quarter Fiscal 2007 Earnings Conference Call. [Operator Instructions].

I will now turn the conference over to Stacy Kruse, Chief Financial Officer of Wilsons Leather. Please go ahead.

Stacy A. Kruse - Chief Financial Officer and Treasurer

Thank you, and good afternoon. On the call with me this afternoon is Mike Searles, Chief Executive Officer of Wilsons The Leather Experts and if his plane which has been delayed arrives on time, Mike Sweeney, Managing Partner of Goldner Hawn Horn Private Equity and Wilsons Leather newly elected Chairman of the Board of Directors.

Before we get started, I would like to remind you all of the Company’s Safe Harbor language. Statements made on today’s conference call either as prepared remarks or in response to your questions may contain forward-looking statements that are made pursuant to the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995, and are subject to risks and uncertainties that could cause actual results to materially differ from such statements. Such risks and uncertainties are described in the earnings release and in Wilsons' most recent annual report on Form 10-K filed with the Securities and Exchange Commission. We direct all listeners to those reports.

Also, certain financial measures we present on this call, constitute non-GAAP financial measures, because they exclude adjustments related to our recent equity financing transaction. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures are included in the table attached to the earnings release and it is available on our website.

Thank you. Now I will turn over the call to Mike Searles.

Michael M. Searles - Chief Executive Officer

Thanks, Stacy. Good afternoon, and thank you for joining us today. A lot has happened to Wilsons Leather during the second quarter. In June, we completed a $45 million private placement of preferred stock and welcomed a new strategic partner, Goldner Hawn Private Equity. We also have been moving full steam ahead with our branded merchandise initiatives.

Our poor second quarter performance is reflective of the significant transition that is underway in our mall stores. For months now you have been hearing how we are going to change the outerwear offerings in our stores to feature nationally recognized brands. Therefore, during the second quarter we made the strategic decision to make sure that our stores are in the best possible position from our merchandise standpoint when our designer brands begin to arrive. As a result, our financial performance is poor; it is a sacrifice that has a purpose.

As evidenced by our margin rates we have liquidated non go forward inventory during this past quarter. This will bring our stores into position to be able to turn faster and present our new product as it arrives in a more dramatic in an impulse-driven shopping environment.

Despite these distractions during the quarter, we have experienced an almost 18% increase in dollars per transactions in the mall when compared to last year. And our average unit retails are 24% higher in the malls this time than last quarter. Customers are willing to spend more for our product. As we have said repeatedly, we just need to get more customers through our doors.

Our strategic shift towards branded outerwear, which was launched yesterday with great fanfare is designed to help drive traffic into the store. Once in our store the combination of increased traffic and our increasing transaction size should help us achieve positive comparable store sales. Our new designer brands for mall stores carry the names of Calvin Klein, Kenneth Cole, Guess and in select stores, Sean John. These brands began arriving at our stores this month.

To support our new branded apparel initiative, we have new graphics, new window and in-store merchandising strategies and most importantly, new brands that are designed to attract new customers and hopefully resonate with our loyal Wilsons Leather customers as well.

Every mall store will be featuring men's and women's style in every brand. While we will be price competitive with department stores, we will earn the customers' business with our broader assortment, unsurpassed leather and product intelligence and superior customer service. While these brands will be the draw, we expect them to realize our strategic goal of increasing our handbags and accessories business by drawing more traffic into our stores.

While it is too early to understand what the impact of branded products would be on our business, we are seeing positive signs. Sell-through on early arrivals of our branded products have performed better than anticipated. I would just pause here and tell you, just very recently, that 11% sell-through in one week of a Guess wool coat with a suggested retail of $220 is a sell-through during a summer month that we have never experienced here before. That was our bestseller last week in our store that has multiple price points and lots of clearance in it. Our second bestseller was a Guess double breasted leather trench, which has a suggested retail of $400. And topping the list as the number one seller in men's was a Calvin Klein basic silhouette at a suggested retail of $495. So, that gives you just a brief glimpse of what we have seen in the last week.

We expect that we will have a fuller understanding of the impact of our branded merchandise during the latter half of September and early October, when outerwear penetration becomes a larger percent of our business. While branded outerwear in our mall stores has been a focus for us, we have also seen positive results in our accessories business. Accessory penetration during the quarter in our mall stores increased to 63% from 57% last year. We anticipate Q3 and Q4 outerwear penetration to be approximately 60% of sales, which is just slightly below last year levels. Mall average unit retails and accessories also increased by 37% during the quarter when compared to the same period last year.

For those of you who have shopped at our stores during this difficult transformation period, I would suggest you revisit those stores to see what the customer will see going forward. We grand opened our pre-season designer presentation yesterday in our stores; our early indications are positive. But we have learned through hard experience to temper our enthusiasm. So I invite you all to visit the stores at your earliest convenience.

With that I will turn you over to Stacy to take you through the numbers.

Stacy A. Kruse - Chief Financial Officer and Treasurer

Thank you, Mike. Before we dive into the numbers, I would like to take a few minutes to bring you up to speed on our financing activities that occurred during the quarter. On June 15th, we closed on the private placement of a newly created series of convertible preferred stock and warrants to purchase Wilsons Leather common stock. We issued 45,000 shares of preferred stock to an affiliate of Goldner Hawn private equity, Peninsula Investment Partners and Quaker Capital Management Corporation for an aggregate purchase price of $45 million. Goldner Hawn led the round with a $35 million investment and Peninsula and Quaker, each invested $5 million.

The shares of preferred stock are initially convertible into 30 million shares of common stock based on a conversion price of a $1.50 per share.

We also issued warrants that are currently exercisable for an aggregate of 15 million shares of common stock at an exercise price of $2 per share. The warrants expire five years from the date of issue and the Series A convertible preferred stock is entitled to a payment in kind, cumulative dividend of 8% each year, issuable semi-annually, payable in shares of convertible or Series A convertible preferred stock. This transaction provided the company with $45 million in new equity before operating expenses.

At the closing of the transaction, we used part of the proceeds to repay our $20 million Term B promissory note. The remaining proceeds are earmarked for general working capital. On June 15th, we also amended our revolving line of credit. The amendment allowed for the preferred stock financing transaction that I just described and increased the percentage of eligible receivables and inventory. In addition, certain eligible equipment was added to our borrowing base.

Now on to the numbers. During the quarter, total net sales decreased 11.3% to $43.6 million from $49.2 million a year ago. Our sales decline is due to an 11.9% decline in comparable store sales during the quarter and compares to a 16.2% decrease in the second quarter of last year. The men's division was down 23.8%, women's was down 16.3% and accessories was down 5.9%. Malls was down 13.1% and outlets were down 10.1%.

While soft sales impacted our margin dollars to some extent, we also took extensive markdowns during the quarter in order to liquidate and reposition our inventory. In order to make room for our new designer brand outerwear, these markdowns were necessary to reduce non-go-forward inventory including carryover sales from prior years. As a result of our extensive markdowns, gross margin during the quarter was negative $2.4 million compared to a positive margin last year of $1.9 million. Our gross margin rates for the quarter decreased 940 basis points to negative 5.6% compared to positive 3.8% last year. While merchandise margins decreased 570 basis points, our margin rates also reflect the de-leveraging realized in occupancy costs from our decrease in sales. The absolute dollar value declining gross margin dollars was $4.3 million.

SG&A expenses as a percentage of net sales for the second quarter were 53.1% compared to 49% of sales last year. The increase in rate is the result of the decline in sales. On an absolute dollar basis, SG&A decreased $942,000 driven primarily by timing and expenses.

Depreciation and amortization for the quarter was $2.9 million compared to $3.1 million for the second quarter last year. Net interest expense in the quarter was $338,000 compared to $322,000 last year. We recorded a tax provision during the quarter of $594,000. The provision is the result of an increase in our deferred tax liability, related to estimated federal AMT tax.

During the second quarter last year, we recorded a $1.1 million tax benefit. The company continues to operate in a net operating loss carry forward position.

During the quarter we recorded a net loss of $29.4 million or $1.17 per basic and diluted share. Our basic and diluted loss per share calculation includes a $15.8 million adjustment that increased out net loss available to common shareholders by $0.40 per basic and diluted share as a result of our June 2007 equity financing. These adjustments include a non-recurring $14.9 million beneficial conversion feature in the Series A preferred stock, and a $1 million deemed dividend to note holders of warrants or to holders of warrants to purchase our common stock that we issued in 2004 as a result of an anti-dilution adjustment to such warrants.

The beneficial conversion feature represents the preferred stocks favorable conversion price to common stock, after allocating offering proceeds between the Series A preferred stock and common stock warrants issued in the June 2007 equity financing, as compared to the closing price of our common stock on the closing date of the transaction. We also recorded a $914,000 Series A preferred stock paid-in-kind dividend payable.

The basic and diluted loss per share for the second quarter of 2007 excluding the equity financing adjustments were $0.75 and compares to a net loss of 2006 second quarter of $24.5 million or $0.63 per basic and diluted share.

Now on for a year-to-date run down of the Wilsons Leather performance. Net sales for the first half of the year were $101.2 million, down 18.3% from $123.8 million in the comparable period of 2006. Comparable stores sales decreased 17.2%, compared to a decrease last year of 13%.

Gross margin rate for the first half of the year is 4%, when compared to 17.4% for 2006. Merchandise margins, as a percentage of sales were down 730 basis points. Year-over-year buying, occupancy and delivery costs were relatively flat, but as a percentage of sales, increased by 600 basis points, as a result of the comparable store sales decline.

SG&A expenses as a percentage of sales for the first half of the year were 47.1% compared to 40.1% of sales last year. On an absolute dollar basis, SG&A decreased $2 million.

Depreciation and amortization for the first half of the year was $5.7 million compared to $6.3 million to the comparable period last year. Interest expense was $769,000 compared to $564,000 last year.

For the year, we have recorded a tax provision of $521,000. A tax spend of $3.9 million was recorded during the first half of last year. The year-to-date net loss was $50.6 million or $1.72 per basic and diluted share. The total impact of the June 2007 equity financing adjustments to our reported net loss for the first half of 2007 was $16.8 million or $0.43 per basic and diluted share.

The basic and diluted loss per share for the first half of 2007 excluding the financing adjustments was $1.29 when compared to a net loss of $31 million or $0.79 per basic and diluted share for the first half of 2006.

Now on to a few balance sheet items. Total inventory including in-transit inventory at the end of July was $64.2 million, of which $54.4 million was available for sale. This compares to a year ago levels of $64.1 million in total and $55.7 million of inventory available for sale.

Total available per permanent selling square foot is $57.22 and compares to $57.65 in 2006.

Our cash balance at the end of the quarter was $8.5 million compared to $33.6 million at the end of the second quarter last year. The decrease in cash relative to last year reflects the influx of the $45 million and the repayment of our Term B promissory note.

Our equity section on our balance sheet will look different as a result of our financing activities. Certain triggering events that may or may not be within the company’s control may have the remote possibility of occurrence and pursuant to EITF D-98, our preferred stock is classified as temporary equity.

Before I turn the call over to Mike Sweeney who has just been able to join us, I would like to take a moment to discuss share guidance for the remainder of the year. Going forward, when calculating earnings or loss per share in each quarter, the paid-in-kind dividend payable of approximately $1.7 million per quarter should be subtracted from net income or loss for basic earnings or loss per share to arrive at net income or loss available for common shareholders. For diluted earnings or loss per share, the paid-in-kind dividend payable must be added back to income or loss available to common shareholders.

When calculating diluted earnings or loss per share, the share count should include the shares of stocks, common stock actually outstanding to shares of common stock issuable upon conversion of the preferred stock and the shares of common stock issuable upon exercise of the warrant issued in both the 2004 equity financing and the June 2007 equity financing using the treasury stock method.

With that I’ll hand the call over to Mike Sweeney.

Michael T. Sweeney - Chairman of the Board, Wilsons Leather Managing Partner, Goldner Hawn Private Equity

Thank you, Stacy. It's my pleasure to join this conference call as my first conference call as Chairman of the Board of Wilsons. I am also the Managing Partner of Goldner Hawn, the group that invested the majority of the recent $45 million capital infusion. And my role in the company, my direct role will be to assist in the analysis of our strategic alternatives which we have discussed in previous published documents, particularly pertaining to our interest in the accessories business. We have been working diligently and hard and spending quite a bit of time in pursuing those alternatives.

We have hired Financo, an investment bank, that’s well-known in the retail and consumer products areas and Telsey Advisory Group which is led by Dana Telsey, who is one of the leading analysts on Wall Street in the retail category.

We’ve also retained IDEO, which is Palo Alto California based innovation and design firm. And they’ve been assisting us in each of those groups -- been assisting us in understanding both the general and industry wide factors in the accessories group and understanding what our options are for an increased investment in that area.

Simply put the reason that we’re interested in the accessories business is that the economic opportunity is substantial and immediately available to us. We’re considering whether to expand our accessories business by the development of our own brand, the acquisition of a small brand or the acquisition/joint venture or licensing agreement surrounding a larger a more well-known brand.

We’ve all been struck by the financial success of Coach and the fine economic engine that that company has built. And as financial analysts in the private equity world, we followed Coach carefully. We think that Coach is a terrific company. But there’s a quite a bit of space around Coach in the accessories business and we don’t think anyone has adequately approached that market; we hope to do so. Of course there can be no guarantee that any of the discussions that we’re having at the moment will lead to a successful transaction. But we wanted to report to you that that is in fact where I am personally working and where my partners at Goldner Hawn are working to further the interest of all of us as Wilson shareholders.

Michael M. Searles - Chief Executive Officer

Okay, thank you, Mike. Mary, I think we’ll open up to questions now, please.

Question-and-Answer Session

Operator

Certainly sir. [Operator’s instructions].

And our first question comes from Shaun Smolarz from Sidoti, please go ahead.

Shaun Smolarz – Sidoti and Company, LLC

Good afternoon everyone.

Michael M. Searles - Chief Executive Officer

Hi Shaun.

Shaun Smolarz – Sidoti and Company, LLC

Hi, my first question is, can you describe the marketing strategy for the fall season?

Michael M. Searles - Chief Executive Officer

Two things, the primary marketing strategy is to showcase the brands that I mentioned at the beginning of my presentation, specifically in the malls, Calvin, Guess, Kenneth Cole and Sean John in the windows in the marketing inside the stores in a way that’s very tasteful and very brand centric. Clearly, what we’ve said before is when customers get past our window, we are experiencing significantly increased transaction size. The issue is getting them into the store. We think first and foremost people who are in the mall walking by the store that for the first time see the fact that we have these brands that go beyond the Wilsons proprietary brand I think will drive in traffic.

Secondly, we just initiated as part of this brand launch, which started yesterday, a direct mail piece that talked to our pre-season designer sale that was launched in two markets, Minneapolis and Chicago. This isn’t the high season for outerwear but we wanted to reach out and get an early test on the reaction for this direct mail piece. It talked to the branded offering that we have, and in a very nice way. And we expect that will generate interest in people that previously have not made us a part of their shopping trip. So the only other marketing other that in-window, in-store, in-mall is that direct marketing piece. We will measure that, obviously it just started yesterday, we will measure that as we go forward and then, if successful, we have monies allocated and plans to go forward on Columbus Day and all of the traditional types of periods.

Shaun Smolarz – Sidoti and Company, LLC

And when you do take that direction out to go into additional markets?

Michael M. Searles - Chief Executive Officer

Yes, the first half is really limited to two markets. If this is, by our definition successful, we would not go into every market because it's not marketing justifiable. But we would cover in the next mailing, over 50% of our store base in the next mailing.

Shaun Smolarz – Sidoti and Company, LLC

Okay. Next question is, when do you expect monthly or same store sales to turn positive and would it be reasonable to expect that to happen in August?

Michael M. Searles - Chief Executive Officer

I can’t -- I’m seeing the CFO shake her head at me. I can’t go for speculation but the one sentence I'd put in there is that, when I read it is, we have in place a pattern which has been in place now for a year that says, if we can get you into the store, we’re going to get significantly increased transaction size.

The missing component to make that positive comp store sales is getting more people into the store. We had a good day yesterday on our first day and it’s a long road to the end. So it’s the combination of what we’re doing right now which is selling more to every customer that comes in and then just multiplying the number of people come in and we’ll see if that branded strategy gets there.

Shaun Smolarz – Sidoti and Company, LLC

In theory, shouldn’t August pose as a good and easy comparison to last August – concerning that last August, most of the -- most stores were under construction as part of the reengineering?

Michael M. Searles - Chief Executive Officer

Yes, based on our comps, you can make that case for a long period of time, Shaun. But yes, the comp comparative is easy. I think the trend is favorable, if you look at, at least the last few months, down 9.9 in June, down 2.2 in July. So one would hope, as we improve our offering in the marketing that 9.9 minus and minus 2.2 turns into a positive at some point. But I can’t tell you when.

Shaun Smolarz – Sidoti and Company, LLC

And one balance sheet question is, what are your thoughts on inventory position at the end of the quarter and also the cash position?

Stacy A. Kruse - Chief Financial Officer and Treasurer

Well, the cash position is largely reflective of paying down the Term B debt, of which now we’re able to borrow under it. So it’s really just kind of a shifting. We previously had a reserve for the Term B debt under our borrowing capacity. So I just look at it as a shift.

As far as the inventory levels, I think to have them flat to last year is really a good position to be in. So I’m comfortable with where they are.

Michael M. Searles - Chief Executive Officer

And if you go in -- I know a number of you who watch us closely have been unimpressed with the caustic nature of our marketing, which was planned to liquidate inventory in preparation for this launch. I think if you go in there now as of this weekend, when we changed our stores, I think you’ll get a different feeling about how we look. And the real measure of success will be, we’re transferring now as we speak. You’ll find very little clearance in the stores when you go in; we’re transferring that to the outlets. The measure of success will be, can we now transfer that traffic that’s going to come in to the stores from purchasing less than $100 coats to more than $100 coats and keep up our accessories performance at the same time. So that’s where we’re watching very closely everyday and that will be the measure of success. If we can get rid of that clearance, trade them up to a higher brand and a better price point, we all win.

Shaun Smolarz – Sidoti and Company, LLC

And so, would it be fair to say then that at the end of the quarter your inventories were clean or--?

Michael M. Searles - Chief Executive Officer

Yes. Cleaner than they’ve been…

Shaun Smolarz – Sidoti and Company, LLC

And so are they where you want them to be or do you still have more…

Michael M. Searles - Chief Executive Officer

No, no, we had planned on at the beginning of this quarter or actually really right about now, we had planned to be 13% of our product in what I would consider clearance, 13% or less in what would be markdown clearance goods. That compares to 26% last year at the same time. So yes, I would say we’re as clean as we’ve ever been. And it should be, given the markdowns we've taken.

Shaun Smolarz – Sidoti and Company, LLC

All right, thank you very much.

Michael M. Searles - Chief Executive Officer

Thanks Shaun.

Operator

Our next question comes from Eric Beder with Brean Murray. Please go ahead.

Eric Beder – Brean Murray & Co., Inc.

Eric Beder from Brean Murray, how are you doing?

Michael M. Searles - Chief Executive Officer

Hi Eric.

Eric Beder – Brean Murray & Co., Inc.

Can you talk a little about -- you talked a lot about the retail stores. What are you going to do? Are you going to do anything different with the outlets? And then a second one for you.

Michael M. Searles - Chief Executive Officer

I think the outlets have been hurt a little bit this year. We kept the clearance in the mall stores a little bit longer. It was a strategic decision we made to burn it where it lies. It was higher fashion than we felt would be typical for an outlet customer. So we chose to try to liquidate most of it in the mall scenario. I think now that it's at a price point that is $50 for a leather coat, and it gets transferred to the outlet, I think you’ll start to see their business start to pick up.

Also we’ve been nicked a little. We have 15 of our largest stores are mills projects -- 15 of our outlets are mills projects and those stores have been experiencing close to a 20% comp store decline, not relative to our initiatives as much as it is a deterioration of I think those mills projects in the marketing or a lack of, I should say that was there last year that’s not this year. So I think we are attacking that as a specific initiative. And then also, now that this product is out of the outlets, on its way to the malls, I think we will see the malls come back. So we had a little blip in the mall performance, but it's not going to change long-terms. It’s what it is. And we’ve also got some brands they we're introducing into that venue that are new to them as well.

Eric Beder – Brean Murray & Co., Inc.

In terms of a non-outerwear product, what is the focus in terms of style, looks, other things for fall? Are you using outerwear to drive people in there, but you have to get, convert them to buy your product basically, your branded product. What are we going to see in fall for that type of items and what kind of trends are you trying to hook on to in terms of this thing?

Michael M. Searles - Chief Executive Officer

Well, what we found is that we went a little too far, a little too fast last year. Leather, really the more finished leathers, for lack of a better word, were a piece we missed. Our bags were a little too oversized. We’ve learned from all of those correctables. I think we are going to be, our accessory performance 65% of our product being sold right now is sold at what we will call our regular intended markups. So that business is healthy in and of itself. But we were down slightly in accessories. Handbags was almost flat in a period where we were walking far fewer customers to the doors.

So, I think what the question that it begs, Eric which I'll anticipate you asking is that absent a brand other than Wilsons Leather in handbags, what’s the correlation between branded outerwear and non branded handbags. And I think that’s the question that we’ve yet resolve and I think Mike Sweeney referred to a lot of the work that he is doing in the market looking for brands. Clearly brands are what sell. I mean look at the success of just nationally Calvin and Guess in all categories of product. Wilsons Leather hasn’t attained that brand status. It wouldn’t take a far reach to say a brand and accessories would certainly perhaps perform better than a Wilsons Leather owned product. Having said all that, we don’t have that answer yet, we don’t have that brand and accessories yet, but we have learned from our mistakes and our performances of all the businesses in an otherwise dark performance, handbags is been our best. So, we will continue to move forward with that until we have a better brand to latch on to, in accessories and handbags.

Eric Beder – Brean Murray & Co., Inc.

Another question. To use Coach as an illustration, when you look at Coach, they went beyond just leather to other types of fabrics, other types of looks. Are you contemplating to go beyond leather and take Wilsons Leather be just labeled Wilson, or something out of the fact, I mean, how do you look upon that?

Michael M. Searles - Chief Executive Officer

Mike Sweeney, are you still there?

Michael T. Sweeney - Chairman of the Board, Wilsons Leather Managing Partner, Goldner Hawn Private Equity

I am.

Michael M. Searles - Chief Executive Officer

Yes, I know you've done a work on the non-leather, leather aspect of the accessories, that might be interested your point of view on that?

Michael T. Sweeney - Chairman of the Board, Wilsons Leather Managing Partner, Goldner Hawn Private Equity

When we think about the accessories, well we think that leather is an important raw material that can be used. But the way that women use these accessories today, handbags in particular, is much more about the design than it is about the material. So, when the design work that we do requires or calls for leather as the best raw material, we use leather in those cases. But there are other times where leather is not the best material for the design. And in those cases, we would use not something other than leather that was more appropriate.

Eric Beder – Brean Murray & Co., Inc.

Okay, thank you and good luck.

Michael M. Searles - Chief Executive Officer

Thanks Eric.

Operator

[Operator Instructions].

Our next question comes from Bill Armstrong from CL King & Associates, please go ahead.

Bill Armstrong - CL King & Associates

Hi, good afternoon. So are the branded products fully stocked in the stores now, or are there still more products to come?

Michael M. Searles - Chief Executive Officer

Still more products to come, but I think you will be impressed with what you see in the store so far. We’ve had a few delivery challenges. But I think if you visit the store, you will think it's pretty full loaded.

Bill Armstrong - CL King & Associates

So, do you have minimum purchase commitments for any of these brands?

Michael M. Searles - Chief Executive Officer

Minimum purchase commitments, no. We have a great relationship with G3, who is our supplier of the branded product. They have been very supportive of this initiative. But no, we don’t have anything other than the obvious purchase orders that we're committed to.

Bill Armstrong - CL King & Associates

Right, okay. As far as accessories go, is there any thought to adding big branded accessories this year or is that more likely to be a 2008 type of initiative?

Michael M. Searles - Chief Executive Officer

I’ll refer that back to Mr. Sweeney.

Michael T. Sweeney - Chairman of the Board, Wilsons Leather Managing Partner, Goldner Hawn Private Equity

That’s a 2008 initiative.

Bill Armstrong - CL King & Associates

Okay. Okay, that’s all I have, thanks.

Michael M. Searles - Chief Executive Officer

Thank you.

Operator

Ladies and gentlemen, the follow-up question from Shaun Smolarz, Sidoti, please go ahead.

Shaun Smolarz – Sidoti and Company, LLC

My follow-up question relates to the share count guidance that Stacy had given us a few minutes ago. I want to know if she could revisit that and explain it in a little more detail?

Stacy A. Kruse - Chief Financial Officer and Treasurer

Well, it's actually quite easy. The adjustments that we made in the second quarter, two of them are one-time adjustments, the beneficial conversion and the one-time adjustments as well as the anti-dilution deemed dividend for the 2004 warrants that were issued. So those are just the one-time things that are just going to occur in the second quarter. They are going to occur for the year, but just in the second quarter, this year only.

The one thing that’s an ongoing thing is the deemed dividend or the PIK dividend -- or the PIK dividend, the $1.7 million each quarter. So when you are calculating EPS, when you are looking for just the income or loss that is available to the common shareholders, you would need to subtract that regularly. And then you would just use the common shares that are outstanding, when calculating the EPS, the basic EPS.

When you are looking at diluted EPS, it’s a little different, in that you have to add back that PIK dividend, because you are looking at both the common and the preferred shareholders and the warrant holders and you have to look at all of the shares that are out there. So you have to take the net income or loss at its entirety and then take the share count at its entirety.

Now the converted preferred and the converted or the regular common shareholders are an easy add. Where it gets a little tricky is when you are adjusting for the warrants and that the warrant piece you have to use the treasury stock method. It's not a one-for-one relationship with the warrants, when you are calculating the diluted EPS.

Shaun Smolarz – Sidoti and Company, LLC

For the calculated diluted EPS, is this a share count higher than 39 million shares outstanding?

Stacy A. Kruse - Chief Financial Officer and Treasurer

Yes, it's significantly higher. Because you have at least the $30 million from the preferred converted and you have now $90 million in warrants that are out there, of which you calculate that in the treasury stock method. So it becomes significantly higher.

Shaun Smolarz – Sidoti and Company, LLC

So what was the reason for why, in the second quarter the diluted share count was the same as the first quarter?

Stacy A. Kruse - Chief Financial Officer and Treasurer

We were in a loss division, so you were just basic.

Shaun Smolarz – Sidoti and Company, LLC

Right. Okay.

Stacy A. Kruse - Chief Financial Officer and Treasurer

So you only get diluted when you are in an earnings situation.

Shaun Smolarz – Sidoti and Company, LLC

That’s right. Okay, all right, thank you.

Operator

There's a follow-up question from Bill Armstrong from CL King & Associates, please go ahead.

Bill Armstrong - CL King & Associates

I think my follow-up was just answered, but just to clarify, so as long as you're in a loss position, we're basically just going to be doing the basic earnings per share calculation deducting the preferred dividend, which is, I think you said $1.7 million per quarter, and then dividing by basic shares.

Stacy A. Kruse - Chief Financial Officer and Treasurer

Correct, correct.

Bill Armstrong - CL King & Associates

Okay, thanks.

Operator

There appear to be no more questions at this time. I would like to turn the floor back over to Mike Searles.

Michael M. Searles - Chief Executive Officer

Mike Sweeney, any closing comments.

Michael T. Sweeney - Chairman of the Board, Wilsons Leather Managing Partner, Goldner Hawn Private Equity

No, I think we have covered it.

Michael M. Searles - Chief Executive Officer

Okay. Thank you all for joining us today. We appreciate there's a larger audience than normal, I expected, because of some added attendance on our part. And we look forward to talking to you soon. Thanks very much.

Operator

Thank you, everyone. This concludes today’s conference call; you may disconnect your lines at this time. And please, have a wonderful day.

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

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