Jones Apparel Group Q4 2007 Earnings Call Transcript

Jones Apparel Group (JNY)

Q4 2007 Earnings Call

February 13, 2008 8:30 am ET

Executives

Wesley Card – President & CEO

John McClain - CFO

Analysts

Jeffrey Edelman – UBS

Robert Drbul - Lehman Brothers

Robert Samuels - JP Morgan

Brad Stephens - Morgan, Keegan & Company

Julie Bryan - Jennifer Black & Associates

David Glick - Buckingham Research

Virginia Genereux - Merrill Lynch

Omar Saad - Credit Suisse - North America

Presentation

Operator

Ladies and gentlemen thank you for standing by. Welcome to the Jones Apparel Group 2007 fourth quarter and full year earnings conference call. (Operator Instructions) On this conference call we will be making forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995 about our business. These statements are based on current expectations of future events and are subject to a number of factors and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. For a detailed discussion of these risks and uncertainties and other important factors that could cause actual results to differ materially from the company’s expectations I direct your attention to the Annual Report on Form 10-K for the fiscal year ended December 31, 2006 as amended including but not limited to the statement regarding forward-looking disclosure and information concerning trends and risk factors included in the management’s discussion and analysis of financial condition and results of operations therein to the information concerning risk factors in the quarterly report on Form 10-Q for the quarterly period ended July 7, 2007 and to their other filings with the Securities and Exchange Commission. We do not undertake to publically update or revise our forward-looking statements as a result of new information, future events or otherwise. Before we begin the company would like to point out that once again this quarter supplemental slides are available on the company’s website for download. I would now like to turn the conference call over to Wesley Card, President and CEO.

Wesley Card

Good morning everybody, welcome to our fourth quarter earnings conference call. Earlier this morning we reported results that generally exceeded the guidance and expectations that we had outlined for the fourth quarter and full year 2007 and this was really gratifying to us especially given the challenging market conditions late last year.

Much has been written and said about the overall economic environment and the highly promotional and generally disappointing holiday 2007 sales, especially in the women’s ready to wear area. We weren’t immune to these issues and during the quarter we funded markdowns over and above our initial expectations, however other factors including lower expenses more than offset the impact of higher markdown allowances. Our own chain of company operated retail stores performed in line with our expectations, registered a 4.8% decline in comp store sales for the quarter. For the full year 2007 our comparable store sales decreased by 6.5%.

Despite the challenges we faced in 2007 I’m very confident that we’re laying the foundation for our future growth and success. I’m going to pass the call over to John now who will cover the more details of our financial performance in the quarter and the full year 2007 as well as some information on our guidance for 2008 and then I’m going to review the businesses including the operational improvements we have initiated during the year and progress we are making to date. John?

John McClain

Thank you Wes, good morning everyone. For the fourth quarter 2007 on a GAAP basis the company reported a net loss of $90 million which equates to a loss per share of $1.06. This compares with the net loss of $270 million and a loss per share of $2.51 for the same period last year. fourth quarter results include pre tax impairment charges of $78 million related to the impairment of goodwill recorded in the company’s Moderate apparel segment and $8 million related to the impairment of trademarks. These charges totaled $86 million represent approximately 5% of the total goodwill and intangible balances and less than 3% of total assets. The 2006 fourth quarter included pre tax charges of $441 million of impairment and goodwill also in the Moderate apparel segment and $50 million of trademark impairment primarily relating to the Norton McNaughton brand.

For the remainder of my discussion the results unless otherwise noted all amounts are adjusted results from continuing operations. Adjusted results exclude the impact of severance and other expenses associated with the strategic operating initiatives, the exit of the Moderate Sportswear business, impairment charges and one-time items which aggregate $101 million in 2007 and $510 million in 2006. Continuing operations also excludes the results of Barneys for all periods.

For the fourth quarter total company net revenues were $848 million compared with approximately $1 billion in the prior year. Major items impacting the quarter’s net revenues were the challenging retail environment, the impact of markdowns and the exit of the Moderate Sportswear lines. The exit of the Moderate Sportswear lines impacted the quarter comparisons by approximately $40 million.

Total company operating income was $12 million versus $70 million last year and the operating margin was 1.4% versus 7%. Major items impacting operating income and operating margins were the level of markdowns required, purging of inventories in several segments at very low margins as we concentrated on clearing our excess inventory and a high level of promotional efforts required in our retail segment. Adjusted EPS from continuing operations was $0.09 for the fourth quarter compared with $0.32 in the prior year.

Before I discuss the segment results and our guidance for 2008, I’d like to discuss the balance sheet and cash flow items. Accounts receivable were $337 million at the end of the fourth quarter versus $358 million in the prior year a decrease of 6%. Accounts receivable term for the year was equal to last year at 7.4 times. The portfolio remains very healthy from an aging perspective. Inventory was $524 million at the end of the quarter versus $531 million in the prior year. I’d like to also note that our inventory balance is down $66 million from September 30, 2007 as we concentrated on clearing excess inventory balance during the fourth quarter purging and promoting where necessary. Inventory turn for the year was 4.8 times versus 5.1 times in the prior year. We generated $121 million from cash from operations during the year compared with $387 million last year. This decrease was due to lower EBITDA, costs related to exiting the Moderate Sportswear businesses, costs related to other strategic initiatives including severance, higher working capital needs and the negative impact of exiting the Polo Jeans company business. I’ve kind of mentioned this before but in contrast, the prior year’s cash from operations was unusually high due to the positive working capital impact of exiting the Polo Jeans business in 2006.

While there’s nothing new to report for the quarter on share repurchases I wanted to summarize the year’s activity. In total we repurchased 23 million shares for approximately $495 million which includes 5.1 million shares through our open market repurchases and 17.9 million shares through the initial of our accelerated share repurchase program. As part of the ASR program we could receive additional shares up to a maximum of approximately 3.1 million. If we do receive these shares, the total share repurchase figures for the 2007 initiated programs will be 26.2 million shares for approximately $495 million or $19.00 a share. So we wait the final settlement of the ASR which will occur no later than July 19, 2008.

Total debt was $783 million, down $107 million from the prior year. This reflects the use of a part of the cash from the sale of Barneys to repay our short term debt. At the end of the quarter we had cash and equivalents of $303 million and no amounts outstanding under our revolving facilities. Our ratio of debt to total capitalization net of cash was 19.4%.

Given the current economic environment, I’d like to spend a minute focusing on our debt and liquidity position. With respect to debt we have $750 million of senior notes outstanding consisting of three separate tranches of 250 million notes maturing in November, 2009, 2014 and 2034 respectively. With respect to liquidity in addition to the $303 million of cash on hand at year end, we have credit agreements with several lending institutions allowing us to borrow up to $1.75 billion consisting of a $1 billion facility which matures in June, 2009 and a $750 million facility which matures in June, 2010. As you can see we are operating from a position of financial strength. At its meeting yesterday the Board of Director’s approved the quarterly dividend of $0.14 per share.

Next I’d like to discuss the full year 2007 results for each of our operating segments and to help you to better assess the business and our targets we are also providing segment guidance for ’08. This information is also included in the slides that we posted to the website today.

For Wholesale Better Apparel revenues were $1.26 billion compared with $1.27 billion last year. The 2006 results include a one month of Polo Jeans sales, however when excluding those sales from ’06, total ’07 revenues are up just over 1%. Included in our ’07 results are an incremental $29 million of markdown allowances over ’06 due to the overall economic environment and the impact of clearing some product. As you would expect segment operating profit margin was affected and was 11.1% in ’07 versus 13.1% in ’06 reflecting a higher level of markdowns. For 2008 we forecast revenues ranging from $1.22 billion to $1.28 billion and operating margins of 10% to 12%. If products perform well and the economy improves we should perform at the higher end of the range.

For Wholesale Moderate Apparel revenues were $1.03 billion compared with $1.15 billion last year. As we mentioned before this expected decline is primarily due to impact of exiting certain Moderate Sportswear product lines which were approximately $100 million lower this year than last. As you would expect these actions required extra markdowns and purging of inventory from the lines we were exiting and resulting segment operating margin was 4.9% this year versus 8.5% last year. Looking ahead to ’08, we forecast revenues ranging from $730 million to $780 million but in the full year impact of exiting the Moderate lines, an operating margin of 7% to 9%. The performance of our products and the markdown levels will again determine our performance.

Wholesale Footwear and Accessory revenues were $1.03 billion versus $1 billion last year. This increase is primarily due to increased sales on our international licensees and in our handbag business. Segment operating margin was 10.8% versus 11.6% last year reflecting the overall environment for markdowns and growth in our international business which has lower margins. For 2008 we forecast revenues ranging from $1.05 billion to $1.1 billion and operating margins of 10% to 11%. We expect our strong performance this segment to continue.

Retail segment revenues were $754 million compared with $821 million last year. Revenues were down primarily due to the closure of our Steinmart retail locations earlier this year and a decrease in same store sales of 6.5%. During the year we were impacted by the highly promotional retail environment and the impact of our turn around efforts which increased promotions and purging of inventory. Resulting segment operating margin was a loss of 5.3% versus a profit of 5.2% last year. For 2008 we forecast revenues ranging from $760 million to $820 million and operating margins ranging from break even to a loss of 1.5%.

Finally I’ll summarize total company guidance for 2008. Net revenue ranging from $3.6 billion to $3.8 billion, operating margin ranging from 5.5% to 6.5%, interest expense of approximately $49 million and an affective tax rate of approximately 36%, weighted average shares outstanding for the full year will be approximately 83 million, this does not include any additional share repurchases. Operating cash flow of $160 million to $200 million, capital expenditures of $90 million to $100 million and depreciation and amortization also in the range of $90 million to $100 million.

In summary our guidance for 2008 adjusted EPS from continuing operations is $1.25 to $1.50. While we recognize this is a relatively wide range we are forecasting against an uncertain economic and retail environment and therefore cautious. While we don’t provide quarterly guidance, there are certain items in the 2007 results that should be considered when analyzing 2008. First the 2007 first quarter includes the result of the Moderate Sportswear lines that we’ve since exited which amounted to about $0.03 of earnings in that quarter. And finally the heavily markdown activity and deterioration of our retail business accelerated in the second quarter of 2007 and continued through year end.

That concludes my comments and I’ll turn the call back over to Wes, Wes?

Wesley Card

Thanks John. Since I assumed the CEO role last July, we’ve been very focused on the actions we needed to take to improve profitability and cash flow. I’m very proud of what we’ve accomplished in a relatively short period and I want to take this time to highlight some of the key aspects of our business and brands and review the turn around initiatives in place.

First of all, in Better Sportswear we continue to focus on a more modern approach to our traditional apparel. The consumer today across all age groups is demanding fashion and trend appropriate wardrobe for all of the lifestyle needs. Better Sportswear in our segment includes Jones New York which is anchored by Jones New York Collection and Jones New York Signature. Both of these brands have evolved their product offerings to address the ever changing needs of their respective customers. And beginning with spring we should really start to see some impact of the changes we’ve made. More casual line extension has been added to Jones New York Signature to capitalize on market share opportunities generated by weak competition and to create a complete lifestyle environment to this customer. In 2007 Jones New York Signature outperformed its competition throughout the year and with these extensions continues to gain market share in 2008.

Moving to Anne Klein, we continue to view this brand as a strong platform for growth across all product categories not just in apparel but in footwear and accessories as well. For the overall brand we’ve maintained a substantial advertising and promotional budget for the brand as a whole for 2008 and we’re in the process of revamping department store fixtures and shops for the Better Apparel line AK Anne Klein, about 250 of those shops are in work and should be ready in early March. We substantially improved the Anne Klein New York apparel product offerings for spring and fall. We took a more design influenced approach through upgrading of fabrications and adding designer like details. We’re pleased to report that reaction to that line which we showed to our major customers last week was very good and we anticipate door rollouts and better penetration in the back half of this year. AK Anne Klein, our Better Sportswear label also had significant growth potential through higher sales penetration per door as we broadened these assortments and developed a true lifestyle approach to the brand. We believe Anne Klein New York has substantial market share growth opportunity due to openings in the Bridge market and the competitive environment in Bridge Sportswear. As part of the strategy to bring together the best talent in the industry and support the line’s growth, we are adding a substantial talent to our Anne Klein New York design team in the near future. We’re very excited about the positive impact this will have for Anne Klein New York and we continue invest in the brand as a whole.

Turning to Nine West Sportswear where as you recall we had product difficulties in the second half of last year, this line is also undergoing a major transformation. We restructured and enhanced the design team last year and while they were able to somewhat impact on the spring line we won’t see the full impact on their other efforts until we introduce fall which comes early in March to our customers. We believe we’re right on the correct formula now for the Missy size customer looking for contemporary styling and in addition, we’re completely changing the way we develop and sell this line. We recognize that speed to market is most critical in contemporary sportswear and going forward we’re giving our customers an opportunity and the option to reserve a significant portion of their orders up front for rapid reorder of key styles as well as an opportunity to infuse the line with trends that are emerging throughout the season with approximate ten week delivery on reorders. To do this we had to take positions on key fabrics and have established programs with our key suppliers to ensure rapid production of goods. We believe this initiative coupled with the advance in the product that we’re seeing for fall is a key formula for success and previews with our key customers support this direction.

The Suit and Dress divisions which include Kasper, Anne Klein, Nine West, Jones New York and La Suit remain solid and are well set for good performance in 2008.

Turning the Footwear and Accessories group here we performed well overall for the year even given the difficult challenges the footwear industry faced and the erratic weather patterns that affected us throughout 2007. In this environment we were able to increase sales and hold operating margins just slightly below 2006. The Footwear and Accessories team has made great progress throughout last year in reenergizing products across the board in our Footwear labels. Nine West, Easy Spirit, Anne Klein, Enzo Angiolini, Circa Joan & David are all marketing enhanced and differentiated product offerings. Boutique Nine has been gaining traction as its being introduced at higher price points than Nine West at selected department stores. The Anne Klein Sport product launch has been very successful and handbag offerings are just now reaching the stores to compliment Anne Klein. Nine West handbags improved dramatically through the year and with the much better matching of the handbags to the footwear offerings we’ve noted significantly improved selling in our own operated stores where the products are displayed together contrasted to the department stores where they’re in separate departments, so it’s really added to the take out of those products.

Throughout 2007 the consumer didn’t really react much to styling in the footwear areas and I think there was a lot of talk about lack of newness. It’s interesting that in the very early reads on spring product we’re seeing a very strong reaction to color, bright colors throughout the sandal and other spring offerings which we have out on the shelves in the southern stores. So we’re now transitioning into new styles as we move out of the promotional months into warmer weather and while it’s still too early to predict trends for 2008 product reviews on our Footwear have been sensational and we feel very strong about the products we’re marketing.

Our international businesses continue to perform well. We market our products in over 1,000 retail locations with partners in over 48 countries. We continue to benefit from sales to those partners which were up in 2007 and in licensing income generated by sales of the products in the foreign markets. This isn’t included in our revenue numbers except from a licensing basis, but total sales outside the US primarily of Nine West and Anne Klein products approximated $500 million in 2007 so it is a substantial business and international is an area we are looking very strongly at.

Turning to Moderate, we substantially completed the exit of the Moderate collections sportswear labels and now have a base business of about $750 million in sales of jeans wear, in junior denim and knitted tops plus a very small component for Moderate Sportswear which we’re doing selectively to certain customers. Gloria Vanderbilt and Energy are the base labels in the group with good penetration at Kohl’s, JC Penney and other key moderate partners and are strong performers. These brands are supplemented by label extensions which provide differentiation for our customers across several channels including GLO, Grane, Jeanstar, Bandolino and others.

Needless to say we are very enthusiastic about the l.e.i. initiative with Wal-Mart that we announced this morning. Under this arrangement Wal-Mart is going to buy junior denim bottoms and knit tops directly from us under the l.e.i. brand that design and manufacture with the opportunity to expand it to many other lifestyle categories including footwear, handbags, etc. The first shipments of l.e.i. to Wal-Mart are going to commence in June to approximately 3,000 doors in the US in time for back to school and we are confident that the strong name recognition and the attention that’s being paid to Wal-Mart to this label will really generate good sales and that the label will resonate with the Wal-Mart customer. We’re very proud that based on experience Wal-Mart recognized our design and operational strengths and our ability to support a high volume business. This initiative combined with the overall design capability and strength of our entire jeans wear group represents excellent opportunity for really good growth and profitability improvement. I should add as well that we’re also in line with the Wal-Mart initiative doing some private label for Macys under Style & Co. and Charter Club which they came to us in order to use the expertise we have in the jeans wear group so we feel very good about the solid business base that we now have in overall jeans wear.

Finally moving to our own domestic retail operations which as you know include about 1,000 doors, I continue to believe retail represents our largest opportunity for short term profit improvement. Segment loss of $39 million in 2007 was really due primarily to our own execution shortfalls complicated by the retail environment. Included in the poor results was the short term negative affect of our necessary and very aggressive turn around efforts. These efforts included increased promotional levels to move inventory, we purged an incremental 1.5 million pairs of shoes out of the system and an expenditure of about $3.5 million on critical store maintenance and repairs in the fourth quarter of 2007. These efforts are now behind us. Our inventories are current, the stores now carry a better balance of merchandise and we have a very experienced management team running this business. My only short term concern is in the ready to wear outlet stores which as you would expect are being affected by the overall difficulties in women’s apparel as we move through fourth quarter into January. We are optimistic however that the new merchandise assortments on order and the merchandise was bought more carefully for 2008 which are just reaching the stores will stimulate sales in this group. Also in 2008 we’re converting the seven full priced Anne Klein New York doors which we had opened which were unsuccessful and generated losses in 2007 due to product limitations at that price point, we’re converting those to AK Anne Klein Shoe and Handbag doors which are going to open on March 1. They’re in prime real estate and we think it’s going to be a great test for this label. It’s performing very well in wholesale channels and where we placed it in some of our doors but we think this could be a very good rollout for us and is a good test for the future. Its also doing very well internationally and these store models are what the international partners use for their stores so it’s going to be a good template for expansion of this label internationally as well.

As I said earlier, I’m very confident that this is a great opportunity for improvement in our operating results and that economy cooperating we should show good progress in our retail operations as we move through 2008.

Let me just list a few of the other things that we’ve done this year that I think are important to highlight. We did complete the initial cost reduction and strategic initiatives that we began in 2005 and we reduced costs by over $100 million as we entered 2008. We closed five distribution centers, we outsourced pattern and production, we implemented new systems. Unfortunately the reduction in revenues, the heavy markdowns we experienced largely offset the impact of that to the bottom line but it really set us up as we move forward and have a very solid base for continuing profit improvements over the coming years. For example the speed to market initiative I mentioned in Nine West Sportswear couldn’t have been accomplished without having outsourced the pattern making. So we think we’re in a really good spot and that there are more efficiencies that we can gain as we go forward.

We’re nearing completion of a comprehensive ecommerce strategy covering all product categories. We’ll be announcing initiatives over the balance of this year which we think are going to drive revenue growth and really put us into this business which we need to be in as internet sales become more important. The first step in the process was to select a new online platform provider which we have done. We’ve signed up with a new email marketing provider and we’re currently evaluating our matrix of page search vendors. These steps are going to allow us to rapidly deploy new brands on ecommerce sites and very cost affectively bring those brands up as well as bring our key apparel lines to the web, with Jones New York coming online in fourth quarter and Anne Klein in early 2009. And we’ve got some very creative initiatives which I’m not prepared to talk about today but we think we can use existing inventory and service capabilities throughout our network of doors, or own stores, to support this business that we come up and running with on the apparel line. So we think we’ve got some great initiatives here and some good profitable revenue growth as we move forward.

And finally we continue to invest in technology. Late last year we successfully implemented the SAP system in our Better Sportswear group and we only had one small apparel division to bring up in the middle of this year. We continue to invest in product lifecycle management, assortment planning, ERP and warehouse management systems. We plan to invest an incremental about $32 million in 2008 on these projects and over time think we will achieve further efficiencies as we get our systems and processes further entrenched.

Finally as we enter 2008 the senior management team is very unified and focused on our key brands and growth opportunities. For the first time ever 105 of the top managers are tied to a performance based driven compensation program that has the entire team focused on the same objectives and on generating positive results.

Just let me comment on the guidance for 2008 before we open up for questions which John discussed, you all saw the January comps that were reported by retailers. It was a disappointing month as everybody is well aware, in fact I’ve seen it called the worst January in seven years or it depends on what you read, but it was, and it came on the heels of a very touch December and generally poor holiday results. As a positive however, we do feel and you’ve also seen this discussed generally, inventories at retail appear to be well controlled. We came off a difficult spring and I think our retailers planned accordingly and so inventories seem to be in good shape. It’s hard to predict how the consumer is going to respond as we enter the year with the stimulus package and other things going on, and all the noise in the background, but there spring is fresh and new and bright and I think that could help as we move through 2008, but our approach has been just plan cautiously, look for opportunities to react to chances in the economic environment as we can and we remain our focus on offering the best possible products, the best value to our ultimate consumer and as demand picks up we anticipated being very well positioned to take advantage of the recovery. With that, we’re now going to open for questions.

Question-and-Answer Session

Operator

Your first question comes from Jeffrey Edelman – UBS

Jeffrey Edelman – UBS

Wesley, my first question is as we look at the progression for the year, could you give us some sense how you had booked spring orders and secondly as we look at your inventories, I guess they’re clean, did you have any delayed shipments from the fourth quarter into the first quarter?

Wesley Card

In terms of how we planned Jeff, last spring if you recall was difficult particularly in our apparel labels. Footwear was better if you go back and turn around there it started, but in apparel we had a difficult spring so retailers planned accordingly and I think we had very conservative booking plans for the spring apparel lines. A lot of the lines were redone over the summer and product improvements were put in place so that we’re going to see that more for fall so it was planned cautiously. At this point, knock on wood, we really haven’t seen significant pressure for any cancellations or delays of product so we feel pretty good about, our order position is on track at this point. I think we were cautious in the outlook because it’s hard to tell how that can play out for the full year. Inventories were clean. Yes I think there was, the calendar shift for our retail customers had a small impact. There was some footwear orders normally we would have shipped in December that had January 8^th start dates because of the new retail calendar and the 53 week year so there was a minor shift of orders but I think in general revenues came in right on our guidance that we had given and you know, our inventories are in good shape. I think where there’s any carry over, excess inventory it’s appropriately marked down and we move it as we do normally.

Jeffrey Edelman – UBS

Okay great and then secondly on l.e.i. was this a losing business for you up to this point, or at least the most recent year. I assume by selling to Wal-Mart you will be dropping your existing businesses. Does this represent a negative first half, positive second half swing?

Wesley Card

Well the goods start shipping in June so I think that’s when we start to hit the significant buy and ramp up of l.e.i. l.e.i.’s been you know, we restructured it several years ago if you remember we had heavy manufacturing, we got out of the manufacturing, we took losses to do that. It’s all outsourced now and the branded business had shrunk down to somewhere around a $60 million to $70 million business. It was an excellent label but if you think about the differentiation the customers are demanding, the primary distribution was in Kohl’s and Penney’s and while it was doing very well there as we entered the year, and it is highly recognized we had fairly low expectations coming into the year revenue wise, but we thought profitability would improve. I think we would have done somewhere around $70 million. We were initially planning [rarely] odd bottoms and tops for this year. We’ll do well over $100 million with the Wal-Mart initiative and that’s for half a year. We should more than double that as we go into 2009. This is a major initiative for us and we think it’s got excellent growth potential. What it does is provides a real solid base for the jeans wear complex and we’ve successfully worked with Wal-Mart in the past. They’re going more towards a branded approach with this. They are putting incredible focus on it. It will be distributed at about 3,000 doors on the launch with 1,200 what they call hot spots which are prime locations within the store, give it great focus. We’re just really excited to be able to use this label very affectively and give us a strong base of operations to build on.

Jeffrey Edelman – UBS

Okay, just one final question. Doing private label for Macys, is this much of a margin detractor or have you found out a way for it to be additive to your business?

Wesley Card

Well the jeans wear group has a double-digit operating margin. And as we get, once as we move out of those Moderate Sportswear labels, get the small piece of business we’re doing there back on track, I think you’re going to see the margins improve, in fact John’s guidance showed an improvement for this year just in our forecast. I think we’re going to do better by the way, in the revenue targets there because of the rollout with Wal-Mart. But you know we need to be closer with Macys in every way that we can. It was, you know, they’ve generally done their own private label and I think this was an area where they felt we could help and add value and it allows us to become much better partners with them across the board. So margin wise it was good business. They’re good partners and hopefully we can help them rollout a bigger business so I think it’s a testament to the strength of the jeans wear group. I think you look at these numbers, we’ll be approaching $1 billion at some point, whether it’s ’09 or just past ’09, it’s hard to, it’ll depend a little bit on the rollout of Wal-Mart. One thing I should add to the Wal-Mart conversation is well, the 3,000 is just domestic and Canada and Mexico, that group will hopefully be soon to follow so we’re initiating those discussions and it’s a very exciting distribution opportunity for us as well.

Jeffrey Edelman – UBS

Great thank you.

Operator

Your next question comes from Robert Drbul - Lehman Brothers

Robert Drbul - Lehman Brothers

Wes I’ve just got one question for you, can you give us an update on any progress you’ve made expanding your relationship in the department store channel particularly with Dillard’s?

Wesley Card

Yes, I think we’ve increased our business with Dillard’s. We’re finally I think testing some shoe orders. We’ve got some good dialogue going there. We spent the last six months last year really reestablishing good relationships with them and we’re working very hard to be good partners with Dillard’s in many ways. We’ve changed our coordinative program, expanded some things to cover some doors that weren’t covered. So we continue to believe it’s an opportunity and we’re pursuing it as aggressively as we can.

Robert Drbul - Lehman Brothers

Great and one follow up question for John probably; can you just help me understand what the $30 million positive adjustment for Wholesale Moderate Apparel in revenue was for the full year?

John McClain

I believe it relates to the markdowns that we’ve taken that get added back when we look at the orders that may have been in place at the time we make the announcement of moving, of exiting those lines and then you’ve got to give markdowns and allowances, but that’s the bulk of that.

Robert Drbul - Lehman Brothers

Okay great thanks a lot.

Operator

Your next question comes from Robert Samuels - JP Morgan

Robert Samuels - JP Morgan

Have you seen anything in the way of cancellations with regards to some of your forward orders and then what are you seeing with regards to floor space in the department stores? Have you been able to take some more space given the struggles of some of your competitors out there?

Wesley Card

I think hitting the floor space first; I think we’re going to get some door rollouts for fall in our Bridge label Anne Klein New York. We’re pushing very hard to increase penetration in the doors for Anne Klein. Overall if you look at the forecast we gave, the revenue base looks pretty solid both in Better, we’re showing some growth in Footwear and Accessories and Better Sportswear has solidified you know, we’ll be right around the level of sales for last year. So I think we are getting incrementally some space in the casual areas which I mentioned under Jones New York Signature. So we continue to push for more floor space. I think as you understand, these things move relatively slowly and it’s going to be based on product performance as we go forward. So I at least feel good that the base is solid. In terms of cancellations as I said earlier, we’re just not; I think spring was planned conservatively. There could be some pressures coming down the road but to date the order book has held very solid and we’ve been shipping according to our plans.

Robert Samuels - JP Morgan

Thank you.

Operator

Your next question comes from Brad Stephens - Morgan, Keegan & Company

Brad Stephens - Morgan, Keegan & Company

Couple of questions for you, first of all if we start with the Moderate businesses and we exclude all the exited businesses from last year and the markdowns associated with those, what was the go forward operating margin in Moderate?

Wesley Card

It was probably just under where we guided it for this year in the 7% to 9%. We don’t have that number broken out here with us but it was driven more by the jeans wear business. The normalized margin in the jeans wear business has been in the low double-digits.

Brad Stephens - Morgan, Keegan & Company

Alright that’s fair. John can you give some idea on your breakdown your CapEx budget for next year, the $90 million and then also give us an update on the cost side and the sourcing fund and if you’re seeing any inflation coming from that angle?

Wesley Card

Well let me take the second part first and then John can comment on the CapEx. There is significant pricing pressure coming for back half from the Far East I think as everybody knows the labor rates have been moving up in southern China significantly. There’s a new labor law, there’s difficulty getting workers and that’s all factored into it as well, and that’s factored into raw material and other prices as well. Cost of gasoline is affecting some of the pricing and electricity in the mills. It’s all creating inflation coming out of China. I think the, in the apparel sector where we’re costing out fall at this point, we’ve been reasonably successful in fighting off some of those because we are holding our orders at this point and there are other cutbacks coming given the softness in the overall environment so I think we have a little bit of opening there which we didn’t have three or four months ago. There are pressures, there are going to be some prices that are going to have to go up. It’s just; I think that’s going to be true across the board. But I think for fall it should be modest. In Footwear we’re experiencing the same difficulties and the footwear factories are reacting, they’re moving operations to lower labor cost areas. We’re balancing off production but we are seeing some pressures for the first time. You know and the dollar translation has had an affect as well there because as you know the Chinese currency has revalued up about 10% in the last two years against the US dollar. So all of that serving to push prices up. I think in the denim world we’re more in the Mid East in terms of where we produce and I think with the huge increase in units that we’re going to be providing to the contractors that will be doing the Wal-Mart business with us, we’re going to be successful in knocking prices down. One other advantage of Wal-Mart we’re also, we’ll be dealing with less SKUs so the factories like that, they gain really good efficiencies in the factory. However I do think in apparel and footwear we’re going to be fighting some cost pressures for awhile and there are going to be spots where prices are going to need to go up and I think we’re hearing that from some of our customers in private label areas as well as from competitors in some of the dialogue as well.

Brad Stephens - Morgan, Keegan & Company

Okay, thanks for that color.

Wesley Card

John, do you want to talk on the ….

John McClain

Sure, on the CapEx side Wes had mentioned about $32 million in technology. There’s about $40 million in the retail stores and that breaks down a little bit of that $30 million in major and minor renovations and about $10 million in new stores. And then the balance of the $90 million to $100 million is just other CapEx that we have whether it’s some computer equipment, some showrooms and remodeling etc.

Brad Stephens - Morgan, Keegan & Company

Thanks guys for all your color, good luck.

Operator

Your next question comes from Julie Bryan - Jennifer Black & Associates

Julie Bryan - Jennifer Black & Associates

Given the markdown money that you gave to the retailers in 2007 could you talk about the assumptions that you’re making from markdown money in 2008 and possibly any changes in how the retailers are ordering given what you talked about with the reorder potential?

Wesley Card

The reorder potential, what I was talking about more was the ability to; we’re watching very closely and will react to demand as quickly as we can. In apparel we’re pretty much bought out now through third quarter. There is some reaction time but it’s going to be primarily in fourth quarter if we were to be in a great position to be increasing plans at this point. So there is some chasing ability. Footwear is a little closer to markets so we could chase if needed in the back half. So that’s what I was referring to in terms of ramping up orders. John do you want to comment on the markdowns?

John McClain

Sure in ’07 it was an extremely heavy year for markdowns. So what we’ve got built into the higher end of the range is certainly less, a better environment than what we saw in ’07.

Julie Bryan - Jennifer Black & Associates

Okay thank you.

Wesley Card

Obviously towards the bottom of the range that would you know include a lot more markdowns and/or affect the cancellations is sort of how we tried to measure that range.

Julie Bryan - Jennifer Black & Associates

Okay great thank you.

Operator

Your next question comes from David Glick - Buckingham Research

David Glick - Buckingham Research

Just a follow-up on the cost side, could you give us maybe quantify what your average costs are going up, is it low singles, mid singles, and how do you look at your initial mark up, are you trying to maintain it, do you try to work a little bit shorter or are you trying to pass through as much of the cost increases that you’re facing as possible?

Wesley Card

You know it’s very hard to generalize an average cost because we have such a broad business between Footwear, Accessories, Apparel and I can’t do that, I think the just the affect of the reevaluation of the currency last year was 10% on costs. That filtered down to raw materials. There was significant, look for significant increases. I think in offsetting that what we’ve really worked hard to engineer and to use trim sourced locally versus trim sourced in the US, push down raw material costs, try to without cheapening the fabric look for alternatives. We are scrambling in that regard and we’re also balancing production a little bit. We’re not, we hedged the bet and we don’t have all of our production in China directly where most of the cost pressure is coming from. I think a lot of it will be offset through as we look at fall, through this reengineering of product and some of the components and there’ll be some price increases. It’s very hard to generalize at this point. We’ve open up fall for apparel in about two weeks and we’re working very hard now on the pricing. As I said we’ve been able to push off some of these increases till late in the year or even into 2009 in some cases. So we’ve been successful just because of the volumes involved.

David Glick - Buckingham Research

Is Footwear the most acute issue, is that because of leather increases and because most footwear is made in China, is that really why that’s kind of the most challenging area?

Wesley Card

Well you’re right, about 95% of our Footwear comes out of China where apparel is probably somewhere around 40%. So it is affecting them a little bit more dramatically and footwear makers are reacting by moving factories in cases and trying to balance out production against lower labor rates. The reevaluation of the currency and the affective oil prices on factory costs and all of that, the labor shortages that really affects the entire south China markets so it’s hard to say it’s more acute in footwear.

David Glick - Buckingham Research

Okay just a quick follow-up on l.e.i. what was the most recent annual volume for l.e.i. You’d given your previous distribution and I presume the Wal-Mart potential is greater than that volume level if you could confirm that.

Wesley Card

It looks like in 2007 between this and the junior denim, we did about $9800 million call it and I think we’re going to do about that much in back half pretty much with Wal-Mart and that would imply a double for 2009 keeping in mind that’s just the initial rollout that we’re [anniversary] and planning at this point, not counting license opportunities, footwear, handbags, you know this is a big volume opportunity for us. This can be a major business for Wal-Mart. They’re putting the focus on it. We’re supporting them in every way we can through marketing and a lot of other initiatives so we, and I don’t want to oversell, this is a major initiative that we are very excited about.

David Glick - Buckingham Research

So you could drop in the first half, will you continue to ship spring orders…

Wesley Card

We are continuing to ship to our current penetration. They’ve been, they want the sales as well. I can’t say that our current distribution was pleased about the move. They were behind this label and you know but we are interestingly we’re back filling some of that product as well look at the back half. We’re in discussions using other labels to pick up some of this junior business with those customers with a different approach and we’ve got some really interesting ideas there that have been grabbed onto. So I think we’re going to get some of that, we’re not going to lose all that revenue, we’re going to get some of it back. And we will intensify the label that is named GLO which is an offshoot of Gloria Vanderbilt which we were actually winding down to put emphasis more on l.e.i. because we feel l.e.i. is a very strong brand name but now GLO will be more differentiated and have an opportunity as well as some of these other labels.

David Glick - Buckingham Research

Great thanks very much, appreciate it. Good luck.

Operator

Your next question comes from Virginia Genereux - Merrill Lynch

Virginia Genereux - Merrill Lynch

Hey Wes maybe can you talk a little more about the sort of the retail margin opportunity. I mean you spent some time on that but I was surprised maybe the margin view wasn’t even a little better for ’08. I think you said flat to down a point and a half. I mean is, have you got the merchandise back to where you want it to be in the retail stores or is it as you said that the ready to wear businesses are a lot softer and are they you know, more are they more of the profit than they are of the sort of the percentage door count or is there something else going on at retail, you know, maybe higher rents and sort of lower sales per square foot where you know this just isn’t the high single-digit?

Wesley Card

Well I think off, if you think about last year we’re coming off a very difficult year and now we’re moving into a very difficult and uncertain economic climate so I think if the economy had been much better I would have thought that the, that guidance would have been very conservative for this year. But we wanted to set realistic targets that we felt we could meet or exceed so initially we set the targets very conservatively and now as we look at the way the year has opened up. Now I am very encouraged, if you remember the first thing that we said, the quickest thing we thought we could around were in the outlet stores, the value stores for footwear and accessories. The product is totally reset. The signage, the promotional levels, we got the pricing back to where it should be. We actually have a positive comp year to date so far this year. It’s still early, you know, a month and a half, but we have a positive comp, margins are up, its working right on tract. And I think you contrast that to the ready to wear stores, comps were very, they performed reasonably well during last year. Comps were very difficult in December and they’ve been very difficult in January into the current period. So we’ve got to get that, into the new offerings for spring. The ready to wear inventory while it’s a short term thing I’m thinking about in terms of just the women’s apparel, it’s the most profitable of all the formats. So I feel pretty confident that this is not a permanent issue. This is just something that we need to move through with the rest of the ready to wear industry and women’s apparel in general. The mall stores, its more conservative approach. I think the regular price doors by; as we open up this month the products will have been reset to a much better mix of fashion versus basic goods. We’ve cleaned up the stores. As you know though, mall traffic has been difficult. So I think the key for us there longer term is going to be what that matrix looks like in regular priced doors with the new model of higher rents and malls moving more upscale, we’re going to be very careful about projects and what doors we’re in, we’re analyzing that portfolio very carefully. We hope that the AK Anne Klein handbag and footwear format is a good vehicle for growth. But we’re very focused on those regular priced doors to make sure we have the right formula going forward. I think all those things combined, its not going to be, you know, this is a lot of work that we had to do to fix these doors. We just replaced all the signage in all the doors. They hadn’t been replaced in five years, all these paper signs and things that just needed to be changed. It sounds like a minor thing but it’s more expensive than you would think. So the stores are cleaned up. The product is great. I think we need to be cautious especially coming off such a difficult year and given the overall environment and I think that operating margin hopefully is going to improve rapidly as conditions improve.

Virginia Genereux - Merrill Lynch

Wes do you have some, are there some stores that are, full priced stores especially I guess, big under performers, cash flow negative that you could close?

Wesley Card

Within the chain, I think this year we’ve got, we’re probably going to open around 40 doors in 2008. They’re all value doors, about half footwear half ready to wear. And we’re probably going to close 40 to 60 doors and there are some that you know, as the leases come up I think if we see a real negative cash drain and there’s ability to negotiate out of a lease, we’d do it. You know that’s an ongoing review that the real estate group does there. So I think we look at it door by door and you know we think the best way usually we take the best approach from a cash standpoint on how to get out of a door. That’s not a, it would be easier to say let’s look at 2007 results and close a bunch of doors; 2007 isn’t a good read. I think that’s not, it was such a difficult year, products were not great, we made so many mistakes, I think we need to, a little more patience and time because I think the Nine West and Easy Spirit doors are relatively solid concepts and would be good for us going forward.

Virginia Genereux - Merrill Lynch

Okay and then how about on the inventory side, you said channel inventories you thought were pretty clean, I was surprised that you know, how do you feel about your inventories. I’d expect them to be a little leaner kind of given the revenue trend and they’ve been, they were in I guess better shape this quarter but there were up a lot sort of going over ’07. How are your own inventories or is that more a function you mentioned John sort of higher working capital, are there businesses that are you know requiring you know more working capital, slow return?

Wesley Card

I think generally our inventories were in good shape at the end of the year. Retail inventories have been well controlled given the situation. We did have some build in some of the replenishment inventories Gloria Vanderbilt and some of the jeans wear group which we continue to work off. Some of it’s just timing but we were pleased that we were down and that we’re in relatively good shape so I don’t think there’s any inventory hang over there. Turns were about the same as last year and we continue to manage that very well, so we really don’t have a concern with that.

John McClain

We looked at timing and in some cases where in the past we might have flown things in, we really tried to make sure that we planned a little better and could ship things in and some things therefore came in a little bit earlier than had in the past.

Virginia Genereux - Merrill Lynch

Okay that’s helpful and then lastly, Wes the Wal-Mart relationship, what would you say is, I assume that’s going to be lower price point product, what kind of margins can you generate on that business ultimately?

Wesley Card

We have generated margins consistent with our segment working with Wal-Mart in the past. You know Wal-Mart, it’s a different model because as I said, we reduced the SKUs by about 60% so it’s a very focused business and it’s virtually cut to order. You know and they take the inventory that they commit to. Wal-Mart tends to go out with an everyday low price, they hold that price. It’s not terribly different than the price the average out the unit door, the average AUR that other retailers are getting on a similar type product. So you know, there’s less of a margin up front but there’s a less of a, the way you sell to Wal-Mart is much less return of profitability at the end in terms of markdowns and other allowances. So we’ve worked with the model, we’ve done in years up to $50 million of private label with Wal-Mart. We know how to do it. We know how to execute it. With the huge amount of units that we’re going to be doing, we’ll be offering the factories much more opportunity for efficiencies and I think if you look around at other vendors that deal with Wal-Mart there can be double-digit operating margins that are very strong and you know, this is a very powerful thrust for us. So I think it will have a positive affect on our margins as we move through the transition and really start getting into the big shipping with them.

Virginia Genereux - Merrill Lynch

Thank you and good luck.

Operator

Your final question comes from Omar Saad - Credit Suisse - North America

Omar Saad - Credit Suisse - North America

Thanks for taking my question, a couple of quick kind of numerical data questions. One is in the quarter John the tax rate looked a little bit low on adjusted base, I’m coming up with around 13%, I just wanted to make sure I calculated that correctly and that that’s not an ongoing item.

John McClain

No as you get towards year end and unfortunately as you’re pre tax number gets closer to break even you get some weird rate changes and you have bigger impact of the tax differential that we do have with the Canadian operations so no, it’s not ongoing. We did a little bit better in a couple of settlements than we had anticipated but no, we got it to 36% going forward.

Omar Saad - Credit Suisse - North America

Got it, and then on the ’08 guidance you incurred a lot of one time charges this year, is your guidance assuming that there are going to be more of these severance and related costs and impairment charges in ’08 or do you think we’ve kind of put all that behind us at this point?

John McClain

Right now what’s built into the guidance is going forward on a normal basis so you know there are no plans right now for any significant restructure issues so; nothing is in there for that.

Omar Saad - Credit Suisse - North America

Okay and then Wes one kind of bigger picture question, if you could address the recent announcement at Macys, what it could mean for you guys, what it could mean for if anything at this point, I know its still really early but in terms of how the realigning their buying groups and things like that. Is there an impact there, is it an opportunity, is it a risk?

Wesley Card

Well I think that Macys is a very important customer of ours. We have a great relationship. It’s a good partnership. We know the people that are being moved around. We have close relationships from the top to the bottom. So I think that with any transition there’s always some risk of transition you know difficulties as they realign buying plans, but our understanding is the teams are coming in two weeks to buy fall. We expect a really good market and to continue to work with them very well. We’re excellent partners with Macys. I think that’s a key factor for us going forward so; there wasn’t a lot of store closing. There were no closings announced with that, so I think that that speaks for itself. Hopefully the realignment there continues to give them better efficiency and better operator because they’re an important part of our business and we want them to succeed.

Omar Saad - Credit Suisse - North America

Excellent thanks, best of luck.

Wesley Card

That’s going to conclude the call. We really appreciate everybody’s coming on the call this morning. We look forward to continuing to update you as we move through the environment and move through 2008. Thank you very much.

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