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Kenneth Cole Productions (NYSE:KCP)

Q4 2007 Earnings Call

March 4, 2008 4:30 pm ET

Executives

James R. Palczynski

David P. Edelman - Chief Financial Officer

Kenneth D. Cole - Chairman of the Board, Chief Executive Officer

Analysts

Scott Krasik - C.L. King & Associates

David Glick - Buckingham Research Group

Sam Poser - Sterne, Agee & Leach

Jeff Van Sinderen - B. Riley & Company

Michael Lippold - Craig-Hallum Capital Group

Heather Boksen - Sidoti & Company

Chris Stein - Galaxy Management

Josh Hector - Kakti

Operator

Good day, ladies and gentlemen, and welcome to the fourth quarter 2007 Kenneth Cole earnings conference call. My name is Betsy and I’ll be your coordinator for today. (Operator Instructions) I would now like to turn the presentation over to your host for today’s call, Mr. James Palczynski. Please proceed, sir.

James R. Palczynski

Good afternoon, everybody. Thanks for joining us. Before we get started, I would just like to read the company’s safe harbor statement.

The statements contained in this conference call which are not historical facts may be deemed to constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual future results might differ materially from those projected in such statements due to a number of risks and uncertainties, including but not limited to demand and competition for the company’s products, the ability to enter into new product license agreements or to renew or replace existing product license agreements, changes in consumer preferences or fashion trends, delays in anticipated store openings and changes in the company’s relationship with retailers, licensees, vendors, and other resources.

The forward-looking statements contained herein are also subject to other risks and uncertainties that are described in the company’s reports and registration statements filed with the Securities and Exchange Commission.

Thank you and with that out of the way, I’d like to now introduce you to Kenneth Cole, Chairman and Chief Executive Officer.

Kenneth D. Cole

Thank you for joining us this afternoon to discuss our fourth quarter and fiscal ’07 results. With me today is David Edelman, our Chief Financial Officer. I’d like to begin with some of the highlights from the fourth quarter.

Net revenues were approximately $120 million, in line with our expectations but slightly below last year’s level of $122 million. Consumer direct comps were down 6% with strong outlet trends offset by disappointing performance in full priced stores.

Gross profit margin was up slightly against last year’s level at 45.6%. Inventory was up 3.8% but excluding product related to our sportswear launch, consolidated inventory was down 2%.

Wholesale revenues were $61.9 million versus 63.9, down 3%. SG&A expenses, however, were up over 600 basis points versus last year, reflecting a shift in our advertising expenses, increased payroll, and a non-cash compensation, as well as start-up expenses for our new sportswear business. We are working to reduce our expenses as we go forward.

In light of our general climate and our specific performance, we closed an additional seven stores since the end of the third quarter, bringing the total to 13 since last January and we have downsized one, as well as the charge we took in the quarter results from our impairment of 23 additional stores.

The loss per share in our fourth quarter was $0.16 on a GAAP basis. I’d note that excluding the one-time real estate charge, the adjusted earnings per share was a positive $0.17 and in line with our guidance.

As you know the consumer retail environment has been under a great deal of pressure since the holiday period and although the business hasn’t trended as we had hoped, there are several bright spots. Our brands remain strong, reflected by the following: our licensing income is flat to last year but adjusted for the sportswear transition, it would have been up 10%; our international business, which is recorded as part of licensing income, is still small but the brand visibility is very good and getting better. Our long-term opportunity overseas remains significant.

We also look at the Internet business as a good brand indicator and although still small, it has experienced significant growth. We’re in the process of outsourcing the back-end functions and are relaunching the new website with enhanced functionality this summer. This is both an under-developed financial opportunity and an important branding media, so we have initiatives -- so we have made this initiative a priority for ’08.

And our outlet business remains good and continues to grow. We opened three new stores in Q4 and another one is opening in March, with four more to open in Q2, with possibly another later on in the year.

We have just launched our men’s sportswear line. It remains early but though we would prefer to have a better environment and perhaps less carrier inventory in the market from our prior licensees, we remain cautiously optimistic about the launch.

We are excited about the recent acquisition of Le Tigre. This strategy is intended to help us develop a mid-tier presence to further diversify our distribution at a relatively low level of risk. As announced recently, we signed a license agreement with J.C. Penny across several classifications of business. As the initial women’s deliveries won’t start hitting the stores until the end of Q2, we don’t expect to see financial benefits until the end of ’08 and more significant ones in ’09.

The women’s apparel will be followed by men’s wear and women’s handbags later in the year, and we are planning to launch small quantities of footwear late this year as well. Although we are optimistic about these various opportunities, due to the difficult trends in the industry and in much of our business operationally at this time, we have accelerated our focus on maintaining a lean inventory and on working to increase churn while keeping our sourcing as responsive as possible.

In addition, we believe there are various opportunities to enhance certain efficiencies which we anticipate will create cost savings while causing little disruption in our business. At the same time, we are also focusing on driving value to our long-term shareholders.

After giving careful consideration to our balance sheet and our cash flow forecasts, our board has -- our board of directors has authorized a significant change in our dividend and stock buy-back program. We believe that the current retail environment and the current capital market environment have created an opportunity because of our strong cash position to aggressively buy back stock as appropriate. As a result, our board of directors has approved a 4 million share extension of our buy-back program. We are currently evaluating a range of strategies as to how to best execute on this.

At the same time, the board has also determined that the diminished cash flow in our business and the proposed use of cash for the buy-back make continuing the dividend at the recent level inappropriate. We have therefore decided to reduce our dividend to $0.09 per quarter from $0.18 per quarter. We think this is the best way to utilize our balance sheet for value to our long-term shareholders at a low level of risk.

I would now like to turn the call over to David Edelman, our Chief Financial Officer.

David P. Edelman

Thank you, Kenneth. Good afternoon, everyone. Let’s start with the income statement. Consolidated net revenues for the fourth quarter decreased 2.1% to $132.1 million compared to the year ago results of $135 million. Fourth quarter wholesale revenue decreased 3.1% to $61.9 million from $63.9 million in the fourth quarter of last year. Our wholesale backlog excluding sportswear is currently down approximately 11% versus this time last year.

Fourth quarter consumer direct revenues decreased 1.4% to $57.6 million versus $58.4 million in the same quarter last year. Comp store sales for the quarter decreased 0.6% versus the year-ago quarter. This was slightly better than our plan, primarily due to positive comps in our company stores.

As Kenneth mentioned, since year-end we have proceeded with our real estate review and closed seven full price stores, downsized one store, bringing the total number of stores closed since the beginning of last year to 13. This leaves us with 86 stores today, 44 full price and 42 company outlets. We also impaired 23 stores. This impairment resulted in a charge of $10.6 million, or an impact of $0.33 per share.

I would also note that the one store we downsized during the quarter was Walnut Street in Philadelphia. We cut the size of the store by 40% but retained most of the sales volume, making excellent gains in store productivity. We are going to continue our real estate review with the intent of identifying other similar methods to improve productivity and to ensure that there is a permanent, careful selection and evaluation process for all stores.

Royalties from licensed products during the quarter were relatively flat at $12.6 million. As mentioned, if you back out the reduction of the men’s sportswear licensing revenues, the core growth rate for royalty would be up approximately 10%. Keep in mind that in 2007, there was still $5 million of men’s sportswear licensing income in our numbers.

Gross profit for the quarter was $60.2 million, or 45.6% of total revenues versus the year-ago level of $61.4 million, or 45.5% of revenues. We continue to make modest improvements in our consumer direct margins; however, these were mostly offset by some weakness in our wholesale gross margins during the fourth quarter.

Consolidated inventory was up 3.8% to $48 million from $46.3 million in the year-ago period. Wholesale inventories, which include men’s sportswear that did not begin shipping until first quarter ’08, increased by 2.6% to $25.7 million. Excluding sportswear, wholesale inventories decreased 8.2% and consolidated inventories would have been down 2%.

Consumer direct inventories increased 5.2% to $22.3 million, with full price store inventories down and outlet store inventories up in line with increased outlet store counts and planned growth.

SG&A expenses for the fourth quarter as a percentage of net revenues were 43.1% compared with 36.8% for the year-ago period. Total SG&A increased in absolute dollars by $7.2 million to $56.9 million from $49.7 million in the year-ago quarter. Keep in mind that we made a heavier commitment to advertising in the fourth quarter versus the prior year fourth quarter, partly to support the sportswear launch but also in preparation for our 25th anniversary campaign.

As we have discussed previously, there were start-up expenses for the sportswear line that we incurred with no associated revenue streams, as the line only began shipping in the first quarter of 2008.

For the full year of 2007, sportswear accounted for approximately $6 million of start-up expenses, including advertising commitment. This was heavily weighted toward the back half.

As a result of the sales decline, higher expenses and the impairment charge, the company reported an operating loss for the fourth quarter of $7.3 million versus the year-ago operating income of $11.6 million.

For the fourth quarter, we reported a loss per share of $0.16 per share. As described, this includes a $0.33 impairment charge related to real estate for our consumer direct segment. Absent this charge, our results were consistent with our prior guidance and we would have earned $0.17 per share.

Now I would like to review some key balance sheet items at quarter end. Cash and marketable securities were $99 million at year-end, versus $117.7 million last year. Keep in mind that during the year, we purchased the Le Tigre trademark for $13 million and used $19 million to repurchase stock. We continue to have no debt on the balance sheet.

In the fourth quarter, we bought back 725,000 shares at an average price of $18.73 per share. This left us with 690,000 shares available for repurchase under the prior authorization. As Kenneth discussed, the board has approved an additional 4 million shares for our buy-back program.

Also as discussed, the board approved a quarterly dividend of $0.09 per common share, payable to shareholders of record as of March 14, 2008, and will be payable on March 28, 2008.

Finally, with respect to guidance, we believe that first quarter net revenues will be in the range of $120 million to $125 million. Please note that these numbers on our original press release were reported incorrectly due to a clerical error. Again, we expect our first quarter guidance revenues to be in the range of $120 million to $125 million. We expect wholesale results to remain challenging and for our full price retail stores to remain under pressure. We also expect to see a continued improvement in our outlet business.

We expect licensing to be about flat to last year’s first quarter, even taking into account losing the licensee royalty relating to men’s sportswear. With respect to earnings per share, we expect a range of $0.03 to $0.05 per share.

Thank you. I would now like to turn the call back to Kenneth.

Kenneth D. Cole

Over the past 25 years, we have seen and weathered challenging environments. In 1983 when we began, we were on the verge of a recession. We have found that for the most part, the industry responds positively to creative alternatives in times like this.

As we reenergize our business, I believe that our innovative and creative culture will be our most important advantage. We look forward to demonstrating such to ourselves and to you -- to our shareholders and to the industry as we go forward.

We are now ready to take questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Scott [Cradell]. Please proceed.

Scott Krasik - C.L. King & Associates

It’s Scott Krasik. Kenneth, maybe talk a little bit about the creep in G&A over the last three or four years. Obviously the sales haven’t been what you wanted but it seems like you just keep adding and adding, you know, on the creative side, there aren’t any cuts. How committed are you to really getting this thing right in terms of expenses?

Kenneth D. Cole

We’re committed to do it, Scott, and we’ve been in transition. We’ve been assessing the various landscape and opportunities and we have -- and I think you will see that significantly change going forward.

Some of the stuff that hit this past quarter is non-recurring stuff and sportswear, we launched advertising -- there are some things that we felt we needed to do in the long-term interest of the brand and the business, but I think when the dust settles, you’ll see that we are in fact focused on this.

Scott Krasik - C.L. King & Associates

So you expect to make cuts in the creative and sales side of the business, where there really haven’t been meaningful cuts over the last couple of years?

Kenneth D. Cole

You know, I don’t -- I believe right now we are -- we need to invest in creative design, sourcing, and inventory management. Those are the three areas we are focused on and I don’t anticipate cutting there. There are a lot of operational areas where we can be more efficient and that is our intention.

Scott Krasik - C.L. King & Associates

Okay. David, maybe talk about gross margins as you see them throughout the year, now that you obviously had a big hit on the wholesale side probably with helping out the department stores, but maybe can you -- and it seems like retail is getting a little better. Talk about how you see those going throughout the year.

David P. Edelman

You know, we were only going out one quarter but we kind of feel like the trend is going to continue. We see some pressure on the wholesale margins and we see modest improvement in both the full priced and outlet store margins.

Scott Krasik - C.L. King & Associates

What’s a realistic margin? Because they have been pretty low on the retail side. I mean, can you get to 55%, 60% gross margins in retail?

David P. Edelman

I think we just want to guide to a modest improvement without giving a specific number at this time.

Scott Krasik - C.L. King & Associates

Right, but just longer term, is that even a possibility?

Kenneth D. Cole

You know, Scott, the way I -- the best way to explain it I guess is I am very committed to try to develop a vertical culture in the company, to run all of our businesses, whether they be wholesale or retail or Internet, as though -- with a vertical business model, sourcing model, product development model, design, beat the market, read and react -- so we are very focused on that. At the end of the day, I do believe it will yield better gross margins at all areas of the business, but it’s not -- it’s not happening as quick as I had hoped and we’ve encountered a few bumps here and there but I do believe over time we will get there.

Scott Krasik - C.L. King & Associates

Okay, and then just maybe talk to -- I know you were close on a CEO candidate who took another position. Are you looking to hire either a president, COO, CEO, and what’s going on there?

Kenneth D. Cole

I am and I hope to have an announcement in the not-that-distant future.

Scott Krasik - C.L. King & Associates

Okay. Thanks, guys.

Operator

Your next question comes from David Glick from Buckingham Research Group. Please proceed.

David Glick - Buckingham Research Group

Thank you. Good afternoon. Kenneth, I just wonder if you could give us some color on the decision about the buy-back and the dividend change. I understand why an increase in the buy-back makes sense and that you would need to make a change in your dividend policy to accomplish that, but could you give us some additional thinking and reasoning behind your decision to make this change?

Kenneth D. Cole

I think at the end of the day, our goal here is we need to serve the long-term shareholders, stakeholders, which are our shareholders, and also our employees and our customers and we need to make decisions consistent with the long-term viability of our goals. And I think -- and we all believe this does that. It’s kind of a little painful because typically -- it’s not typically done. You don’t instill a dividend and you don’t typically seek to lower it. [You are only allowed to raise it] but these are extenuating times and circumstances. And you also don’t typically go out and buy tons of shares like this opportunistically and we are -- but again, to the same point, the stock is at a price and we feel that it’s a -- that’s it’s appropriate opportunistically.

David Glick - Buckingham Research Group

Great. I appreciate that color. Thanks and good luck.

Operator

Your next question comes from Sam Poser from Sterne, Agee.

Sam Poser - Sterne, Agee & Leach

Good evening. Kenneth, you mentioned in your prepared remarks about the operational problems that you were going through, the in-house operational problems. Can you give us a little more color on that?

Kenneth D. Cole

Well, I think I did. I think that typically first of all in a declining environment and a descending business, it’s difficult and -- so we have new systems, SAP is up and running but still not to the degree that it needs to be and we are trying to operate our inventory -- process and inventory management -- you know, I believe strongly that as much as we need to own the right inventory at the right time, to the degree you have it in the right place at the right time is even more important, and that’s where we are very focused because -- you know, if the inventory is in store A but you need it in store B, or if the inventory is in red and you need it in black, regardless of the quantity of the inventory, if it’s not the right inventory, you fail.

So we are very focused on getting that better. I’m not happy with our speed to market. We are not responding quick enough to opportunities and we are not responding quick enough to liabilities. And we need to get better at it and we can’t relent here because I really believe today that it’s vital that we prevail here because there isn’t a safety net in this industry like there used to be. There was always a way to kind of move product through the pipeline at a less than onerous cost. There isn’t today, so you -- and mistakes are expensive. You need to test better and you need to respond quicker and more efficiently, so that’s our focus.

Sam Poser - Sterne, Agee & Leach

Now with the -- I guess with your allocation systems and your speed to market, do you have the proper systems in place on top of SAP to get that done, or is that part of the investment that you are going to need to make going forward?

Kenneth D. Cole

Well, it’s an investment we’ve made up until now. Is it as good as it needs to be? Maybe not. Are we better than we’ve been? Yes. Do we need to get a lot better than we are? Yes, candidly to a degree I know we can and I think we are need to just figure it out. We’re not looking to invest anymore right now systemically than we already have. I think we’ve kind of burdened our balance sheet with the -- for the time being and so we are going to make this work to a degree that is appropriate.

Sam Poser - Sterne, Agee & Leach

Okay, thank you and then David, I want to follow-up on Scott’s question about how to think about gross margin and SG&A, at least in the first quarter and onward. I mean, are pressures going to -- pressures are going to remain in place you see for the year or for the quarter? I mean how -- again, I just want to -- I need a little more there, if you wouldn’t mind.

David P. Edelman

I think we’re going to continue to see improvements in our retail and outlet store margins and the department store channel is pretty tough, so we’re seeing in the early part of the year some gross margin pressure in that channel. So it probably is kind of consistent and will remain relatively flat in our margins in the near-term, consolidated.

I think on the SG&A levels, we’ve talked about this in the past. We’ve built up our expenses relating to sportswear. We’ve built up our expenses relating to some advertising, SAT and until we get into the middle of 2008, those expense levels will not anniversary each other, so in the early part of the year SG&A will remain higher and then we expect to drive it down with some efficiencies that Kenneth referred to, as well as just getting a comparison.

Sam Poser - Sterne, Agee & Leach

Thank you very much, and when do you think you’ll have a good read on the sportswear? It’s just hitting now. When do you think we’ll start to have a read? And how much excess inventory of the old PDI product is around and I guess forming the caution that you have right now, from the cautious optimism?

Kenneth D. Cole

I mean, there’s a little bit more in Macy’s than there is in other places but I don’t know that it’s that much, but unfortunately that stuff needs to be moved through the pipeline and -- you know, the response we are getting to the product is good, the market is liking the product, they are wanting to grow the businesses. We are kind of trying to hold it back and the initial [set of clothes] did not [to the degree] we had hoped they were, but they are not much different than the department and than our peers. And considering the circumstances, we remain cautiously optimistic. But I do believe over time this is going to be a great business.

Sam Poser - Sterne, Agee & Leach

Thank you very much.

Operator

Your next question comes from Jeff Van Sinderen from B. Riley. Please proceed.

Jeff Van Sinderen - B. Riley & Company

Sure. Just a follow-up on the sportswear, since you were talking about that; just wondering if there are parts of the assortment that are selling better than, or selling through better than other parts, where you are seeing some early success there, where you might need to reassess. And then also how that product is performing in your own company-owned retail stores.

Kenneth D. Cole

There are items that are selling well and there are some classifications -- knits are selling better than wovens, and [vests] are selling better than pants, but again it’s early, so I’m just reluctant to make any substantive decisions based upon the results up until this point.

Jeff Van Sinderen - B. Riley & Company

Okay. Can you talk a little bit more about your full price retail business and where you are seeing strengths and weaknesses there and what you are doing to improve that business, how you are managing inventory there? And I guess maybe how and why trends are different at your outlet stores versus your full price retail stores?

Kenneth D. Cole

You know, we -- we stopped -- we broke the businesses apart. We’ve been operating them as one up until, well, maybe a year-and-a-half, two years ago. We broke them apart and now they are operating individually and now the new model puts a burden on the regular stores to disclose their own inventory. To the degree outlet determines its viable and appropriate through that medium, then so be it.

So they are modeled a little bit differently. They take markdowns a little bit quicker, more severely in order to move the product through and to stay appropriately lean. We are trying to run those businesses a little bit more fluidly so that they can respond to opportunities and needs and we are trying to run our sourcing network so that they can supply those needs, none of which is anywhere near to the degree it needs to be and it’s a big part of our focus.

You know, it’s tough in a descending environment sometimes to realize the benefits, efficiencies, and the results that you seek to. And we’ve cut stores and we’ve tried to consolidate some structure there and we continue to look at opportunities to have the best product in the right stores at the right time. And at the end of the day, that’s what it’s going to take.

Jeff Van Sinderen - B. Riley & Company

Okay, and then in terms of manufacturing and sourcing at this point, can you just touch on any cost pressures that you are seeing there, if at all?

Kenneth D. Cole

On men’s sourcing?

Jeff Van Sinderen - B. Riley & Company

No, no, manufacturing --

Kenneth D. Cole

Manufacturing sourcing?

Jeff Van Sinderen - B. Riley & Company

Yeah, exactly.

Kenneth D. Cole

A lot of the sourcing is in China. We have a new sourcing facility. We have an office, a more expanded office over there. Prices are going up a little bit in China. I think most people know that and we are finding that the market is able to deal with it for the large part and in some degrees, it isn’t but -- and it’s -- you know, the men’s are new and we are not sourcing through our office. We are using an outside entity. I think we’ve discussed that in the past, we’re using [inaudible] for that. And there’s some pressure, obviously currency pressure against the Euro for the stuff we’re sourcing in Europe. We’re not sourcing that much still in Europe but -- but on the other -- but the reverse of that is we are getting a lot of positive response to our product now which we are showing overseas, so it will have offsetting benefits -- unfortunately they are not material enough yet -- but as we sell our products internationally.

Jeff Van Sinderen - B. Riley & Company

Okay. Thanks very much and good luck this quarter.

Operator

Your next question comes from Michael Lippold from Craig-Hallum Capital Group. Please proceed.

Michael Lippold - Craig-Hallum Capital Group

Good afternoon. You mentioned in your [bright spot] visibility internationally being a positive. Could you give us an idea of when we can start expecting this to make a financial impact?

Kenneth D. Cole

Good question. You know, a lot of our international business, except when -- we run certain of our businesses internally. We run them as wholesale businesses. Footwear, for example, we will distribute footwear wholesale-wise worldwide. Except to the degree we have licensees who own stores, which is what is the case, of which is our business model in the Mideast, Central and South America, and in parts of Asia, where they will buy the product through a wholesale process, through a [first cost] process, [first cost] plus. And we have Kenneth Cole stores and we have actually 70 of them internationally right now, plus shops on top of that, 30-plus.

And then the wholesale model is they buy the product wholesale through our -- where we run a wholesale business, which is what we do in footwear and handbags. So that business is growing because it’s new. It’s something we’ve only really been focused on it now for a couple of seasons and I think you’ll see -- you know, it includes revenues and gross margins and some of those better businesses over the next several seasons but they are not material. They won’t be probably for a little bit.

We also are in -- our stores, by the way, which I started to say, we license those so they show up under the licensing line in the P&L because it was part of royalties and -- but that I think is starting to grow and I think you’ll see significant growth over maybe two or three years. We’re looking at big, more substantive deals in Asia right now, one in India, a bigger one in China, that can have a bigger impact on the bottom line.

Michael Lippold - Craig-Hallum Capital Group

Okay, and then part of your buy-back comments, you mentioned you are exploring strategies on how best to do it. Can you give us an idea of what type of strategies you would be exploring?

Kenneth D. Cole

We don’t have a plan yet. This all came out of a board meeting yesterday. We’ve been in touch with our advisors on this and we are exploring it. We bought back this past quarter I think close to a million shares but we bought them -- I think we had a 10-D filing and I don’t know that that’s what we’ll do again. We set a price and we set a threshold. If it hit that price, we bought it. Now we have no specific plans. We have plans to make plans. That’s where we are right now.

Michael Lippold - Craig-Hallum Capital Group

So you might consider a tender or something of that --

Kenneth D. Cole

You know, I can’t -- it’s too -- it’s premature for me to answer you on that, but --

Michael Lippold - Craig-Hallum Capital Group

Okay, that’s fair, and then -- so 4 million shares is in addition to the -- I think you said 693,000 remaining in the previous stock repurchase?

Kenneth D. Cole

That’s what will remain in our pool, authorized by shareholders as of now.

Michael Lippold - Craig-Hallum Capital Group

Okay, and then one last question -- David, in the past you’ve referenced this global cash register sales number that I think you mentioned like $1.6 billion in the past to kind of talk about the strength of the brand. Can you give us what that number was for 2007?

David P. Edelman

I can work that after but right now, it’s around the same number. We’ve had a little bit of a decrease in our wholesale numbers, a little bit of decrease in our consumer direct, and we’ve had some growth internationally, so it probably hasn’t changed all that much.

Michael Lippold - Craig-Hallum Capital Group

Great. Thank you.

Operator

Your next question comes from Heather Boksen from Sidoti & Company. Please proceed.

Heather Boksen - Sidoti & Company

Good evening, guys. A couple of questions; can you tell us what CapEx and depreciation were in ’07 and what plans are for ’08?

David P. Edelman

You know, we are going to file our K on Thursday and you’ll have all that information. ’08 CapEx is around $10 million.

Heather Boksen - Sidoti & Company

And plans for depreciation in ’08?

David P. Edelman

Well, it’s going to run at a similar rate that we had minus the impairment charge, but I think you’ll be able to calculate it. We are going to open up seven outlet stores and hold our retail stores steady and as Kenneth mentioned, we’re not looking at any significant CapEx [systems].

Heather Boksen - Sidoti & Company

Okay, and with respect to these additional shares on the buy-back, is there an expiration on this?

Kenneth D. Cole

No.

Heather Boksen - Sidoti & Company

So it’s an open-ended plan?

Kenneth D. Cole

Yes.

Heather Boksen - Sidoti & Company

And is there a timeframe that you are looking to do this in?

Kenneth D. Cole

No. I mean, we are looking to do this in a manner that’s appropriate and reasonably opportunistic and how we feel we can best realize the best returns for our shareholders with our financial resources.

Heather Boksen - Sidoti & Company

All right. Okay, thank you, guys.

Operator

Your next question comes from Chris [Stein] from [Galaxy] Management. Please proceed.

Chris Stein - Galaxy Management

Thanks. I was just hoping to get what the accretion is on the store closures for ’08 and then also, my impression is that the Le Tigre acquisition has kind of changed a little bit since it was originally made. Is there an inventory -- I think previously it was supposed to be a licensing revenue. Now that you own the brand and the staff, is there going to be an inventory commitment going into J.C. Penny’s and if so, how much is that going to be roughly?

David P. Edelman

I’ll talk about the accretion. We feel that the accretion due to the impairment as well as the store closings is around $0.06 or $0.07 on a run-rate going forward.

Kenneth D. Cole

And the Le Tigre, we are only going to -- we are only operating the footwear business as a wholesale business for now. Everything else is going to be run as a licensing model, where we have a design staff, we have a branding staff, and J.C. Penny will buy the product from factory direct and they’ll pay us a royalty and/or the suppliers but we are not going to have any exposure or operating risk in that regard.

Chris Stein - Galaxy Management

And so the expectation for flat licensing revenues in ’08 includes the incremental lift from Le Tigre?

Kenneth D. Cole

The Le Tigre incremental is not significant but it does include --

David P. Edelman

It is included and we are also -- you have to back out of the base the last piece of the licensing revenues that we received on men’s sportswear.

Chris Stein - Galaxy Management

Okay. Thank you.

Operator

Your next question comes from Josh Hector from [Kakti]. Please proceed.

Josh Hector - Kakti

Just a couple of quick thoughts -- can you tell us, did the big store in New York in Rockefeller Center, did you ever find a tenant?

Kenneth D. Cole

We have not found a tenant that made sense. We are operating the store right now. We feel it costs us, the store loses money, but it enhances our stature worldwide. There is clearly an offset. We will continue to explore the viability of either path and -- but we don’t have -- right now, we are committed to make that store better. It’s actually doing okay as we speak and -- but we are also open to alternatives should they present themselves.

Josh Hector - Kakti

I remember that Q1 is usually the strongest Macy’s quarter. Are you -- especially with the guidance being a lot less in earnings, are you worried that this is a symbol that Macy’s is kind of falling out of favor with Kenneth Cole? Is this an issue for us with Macy’s?

Kenneth D. Cole

I don’t understand the question. Our Macy’s business is okay.

Josh Hector - Kakti

Macy’s business is okay?

Kenneth D. Cole

Yeah, we had a men’s sportswear -- with men’s sportswear we had some residual inventory. We have a very healthy Macy’s relationship.

Josh Hector - Kakti

Is sportswear still on track to fall between the consensus guidance on the street between $13 million and $50 million of sales for ’08? Is that still a reasonable expectation in between those two big markers?

Kenneth D. Cole

We never gave any numbers on sportswear.

Josh Hector - Kakti

No, I know, but you’ve got a bunch of people that cover this professionally and they’ve kind of put a number out there. You can’t tell us if it will fall in between the guidance? I mean, that’s a $35 million hole.

Kenneth D. Cole

Yeah, it’s in that guidance.

Josh Hector - Kakti

Okay, and just looking at what’s going on in the mall, you guys are cautiously optimistic, which I understand. Are the costs of operating the retail stores in the lease cost, the increases that we know are coming through, are you worried about offsetting those with sales, given that we are experiencing a weaker environment? I mean, that would be the number one driver, right? You’re not going to have a big people step-up in costs and retail?

Kenneth D. Cole

We need to get the product as good as it can be. That is our goal. That is our objective. That is the need. Once we get that product turning better, performing better, the business gets extraordinarily better exponentially. The incremental costs are not really the issue here. I mean, we are obviously addressing them. We are monitoring them, we are looking at it but we have to fix the product and we’ll be fine.

Josh Hector - Kakti

You think if we just had the right stuff in the store, people would visit?

Kenneth D. Cole

I know that.

Josh Hector - Kakti

Okay. Has the ad spend for the 25th anniversary program been adjusted given the lower guidance and lower cash flow? Have you made any adjustment to how much you are going to spend?

Kenneth D. Cole

We are going to look at the second half of the year spend. Obviously it isn’t committed yet and it’s not locked in and we have still a little bit of time before it becomes such. We also have the holiday spend, which also isn’t obviously committed. So we are going to make that decision when we get a little closer.

Josh Hector - Kakti

Okay. Just two more and I promise, I’ll get out of your -- the retail stores, are the stores that are remaining four-wall profitable now that we’ve closed all the stores you wanted to close? Are we four-wall profitable across the board now?

David P. Edelman

No, actually, we impaired certain stores that are still not four-wall profitable.

Josh Hector - Kakti

But once you take the impairment, does that make them four-wall profitable? What does that impairment mean?

David P. Edelman

The impairment means that under the model for accounting purposes, my future cash flows don’t exceed the asset value and we took a write-down.

Kenneth D. Cole

These aren’t -- this wasn’t a strategic decision we made. This is somewhat laid out -- this is somehow mandated by basic accounting requirements today, so we did what we were asked to do. We obviously think these stores are viable. We think that we can get them right once we get everything else right and otherwise, the decisions would have been different. We would have closed [them], which we are not doing.

Operator

There are no questions at this time. I would now like to turn the call over to Mr. James Palczynski for closing remarks.

James R. Palczynski

Actually, it will be Kenneth making closing remarks. Thank you, Operator.

Kenneth D. Cole

I just want to as always thank our supportive shareholders for their continued loyalty, for our customers and consumers for theirs, and most importantly of all, for our hardworking, dedicated, and loyal Kenneth Cole organization who enable us to do everything that we do every day. Thank you, Operator.

Operator

And thank you, gentlemen. Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect and have a wonderful day.

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Source: Kenneth Cole Q4 2007 Earnings Call Transcript
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