Perry Ellis International F4Q08 (Qtr End 2/29/08) Earnings Call Transcript

Mar.18.08 | About: Perry Ellis (PERY)

Perry Ellis International (NASDAQ:PERY)

F4Q08 Earnings Call

March 18, 2008 11:00 am ET

Executives

Francisco Hoffmann - IR

George Feldenkreis - Chairman and Chief Executive Officer

Oscar Feldenkreis - President and Chief Operating Officer

Thomas D’Ambrosio - Interim Chief Financial Officer, Senior Vice President and Corporate Controller

Analysts

Jody Kane - Sidoti & Company

Jeff Mintz - Wedbush Morgan Securities

Andrew Berg - Post Advisory Group

Robin Murchison - Suntrust Robinson Humphrey

Phyllis [Cammara] - Paxworld Funds

John [Kurdy] - Principal Global Investors

Steven Martin - Slater Capital Management

Operator

Good day everyone and welcome to Perry Ellis fourth quarter and fiscal 2008 earnings conference call. Today’s conference is being recorded. At this time for opening remarks and introductions I would like to turn the conference over to Mr. Francisco Hoffmann Investor Relations and Strategy. Please go ahead sir.

Francisco Hoffmann

Thank you operator. Good morning ladies and gentlemen and welcome to Perry Ellis fourth quarter and fiscal 2008 conference call. You should have received a copy of the press release that went out yesterday night including the income statement and balance sheet. If you have not found a copy of this release it can be found on the website at www.pery.com.

Before we begin I would like to remind you that some of the comments on the call, either as part of the prepared remarks or in response to your questions, may contain forward-looking statements that are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Such information is subject to risks and uncertainties as described in the press release and in documents that we have filed with the SEC.

Joining us today for this call from Perry Ellis are George Feldenkreis, Chairman and Chief Executive Officer, Oscar Feldenkreis, Vice Chairman and President and Chief Operating Officer and Thomas D’Ambrosio, Interim Chief Financial Officer.

I would now like to turn the call over to George Feldenkreis, Chairman and CEO. George?

George Feldenkreis

Thank you Francisco. Good morning. According to our [inaudible] men's wear business last year saw an increase of 2.4%, while the women’s business dropped 2.3%. I mention this because it is important when investors analyze the areas that have been and are most vulnerable to retail slow down they should use these facts to understand why good men’s wear companies continue to do well and some of us project doing even better this year, barring of course unforeseeable market events.

We are very proud to report the record year that finished on January 31. Revenues increased by $34 million or 4% and earnings rose from $1.58 to $1.80, a 14% increase. Our EBITDA grew from $71 million to $76 million, a 7% increase.

In the fourth quarter our revenues increased from $232 to $212 million mostly due to a slow down in our bottoms replenishing program and our exiting of some private brand bottoms business that we were doing with some retailers.

The last year saw a number of very positive developments for our future. For example, it was the first time we turned a profit on our Perry Ellis retail operations. We continued to invest in operating more outlet stores and have now become a profitable venture as well as a good show case for our products. We also continued to invest in our ecommerce and penguin retail strategy which is necessary for the continued development of those initiatives.

Licensing had a great year with increased revenues of 14.3% from $22.2 to $25.5 million. However, going forward there are a number of opportunities being presented to us. For example, we will be signing this week a new licensee for Perry Ellis Home Fashion. There has never been a home fashion line under the Perry Ellis name and we are very excited about this opportunity. Last month we announced we would not be continuing with the Tailored clothing license with [Hardmark]. I am glad to report we are now negotiating a new license with a very strong clothing company that would place all its emphasis on building a strong Perry Ellis Tailored clothing business.

During the last quarter we signed an agreement with [inaudible] Hong Kong owned by the younger group in China to manufacture Perry Ellis dress shirts. We expect that the licensing income in 2009 for dress shirts would be much higher than we were netting when we were making the Perry Ellis dress shirt line ourselves.

New licensees for outerwear and footwear continue to make progress in placing orders and we will see major contributions from them by the end of this year and into next year.

We are also on the verge of signing several new international licensees for our different brands.

Last but not least the acquisition of Laundry and C&C opened up tremendous new licensing opportunities. At this point there is only one licensee in Laundry. We feel that there are a number of products that could be licensed to be made under those great names and we are already getting calls from interested parties.

On the International side we continue to make progress in building original [payment] in the UK and Europe. We got back the Gotcha license for Europe which we expect to be a profit contributor in the next fiscal year. We are also negotiating with different possible licensees of joint venture companies in China and India for some of our major brands. We are very confident that in the near future we will be to conclude some very valuable agreements.

We believe that in this environment it is critical to remain focused on organizational improvement. We continue to proceed with investing in the necessary technologies as well as training our associates for the increased needs of our retailers to improve the management of each one of their doors as far as sizes, colors and merchandise assortment.

We have deployed the retail color good system where we have made an investment of over $6 million during the last two years. As we train our associates to better use the [light of cascade] of information flowing out of over 10,000 stores of point of sale that we are now servicing, we will work with our retail partners to make them more productive in each one of their stores as they learn more about the weather conditions and demographics affecting each location.

We have closed our Distribution Center in [Winsboro] where we expect to save about $2 million a year in distribution costs.

We are very pleased that within five weeks of closing C&C and Laundry transactions we were able to transfer all of the information into our system and complete the integration of these two businesses into our company in record time. I have to mention that some of our competitors that have made similar acquisitions have not been able to accomplish such a feat even after years after the purchase date.

We continue to be focused on producing our operation on charge backs, a major initiative that should result in increased net profit.

The current trends in interest rates and our lower debt will also be a contributor to this year’s lower interest costs.

Just for your information, if we exclude the $34 million that we paid for lease, today we are borrowing $40 million less than a year ago.

We continue the process of constantly assessing our sources of supply. There is no question that prices in China will be rising. The question is how to bring new products to our offering that would justify higher retail prices as well as how to move some garment production from China to neighboring countries. Last year China constituted 30% of our purchases. We expect this year that will be down to 25%.

As far as the economy is concerned, we still see 95% of American’s being employed and receiving their weekly salary and 92-97% of mortgages being paid on time depending on whether you [inaudible] or some other estimates. While these numbers are definitely not encouraging they also do not depict the gloomy scenario that the financial institutions are going through especially the ones that created the phony paper instruments that are now affecting all of us because of their greed and negligence.

Based on the information we have today we are still seeing a good year for our company and our stockholders. We expect our sales to grow to between $910 and $925 million from $864 million this year and we expect our net income to grow from $28 to between $30 and $31 million or from $1.80 to $1.95 per share. Naturally we will be watching very carefully what is happening in the retail industry, but we feel very strongly that our strong product offerings coupled by our great brands and focused, hard working management, will continue to elevate Perry International to new heights. The acquisition of C&C and Laundry has really opened up tremendous opportunities for us in bringing in a new customer base, which Oscar will expand on.

I want to take this opportunity to thank the analyst from Barron’s Magazine, Ms. Robin Goldwyn Blumenthal who in her article this week referred to Perry Ellis as “superior management, stronger finances and a healthy outlook for their brand.” Thank you for “superior management.” You usually don’t get that recognition.

The Chinese say “May you live in interesting times.” Nobody would argue the fact that these are very interesting times. But they also represent great challenges and unique opportunities to acquire assets at prices that only a few months ago were unthinkable. At the same time it serves to delineate which are the better players and the not so good players for the future.

We are very confident about our future and we thank all our stockholders for it.

Oscar?

Oscar Feldenkreis

Thank you, George. Good morning. I am proud to report results of another solid quarter for Perry Ellis International which capped a record fiscal 2008. Our success this year in a challenging retail environment is a testament to the strength of our brands, our diversified business platform and our ability to develop niche businesses. As we recap fiscal 2008 and move into 2009 there are certain macro trends taking place in the apparel businesses that favor Perry Ellis International’s strength according to NPD. Overall men’s apparel had a positive growth for the year while ladies businesses had a decline.

As well, we have benefited from the strategic decisions of several men’s wear companies to go exclusive to one retailer or adjust their channels of distribution. Today Perry Ellis International has a portfolio of lifestyle brands that service all channels of distribution and multiple lifestyles from Golf and Hispanics, to Action Sports and Contemporary. Not to mention our ability to bring to market a whole collection of tops and bottoms, we believe our business model and brand strength distinguishes us from our peers and provides us with a strong platform for sustained growth.

Now I will address some of last year’s accomplishments and bring you up to date on our key initiatives for fiscal 2009.

First, one of our biggest successes for fiscal 2008 was the reduction of our private label business during this year. We exited over $40 million of private label programs mainly in bottoms while we grew over $80 million through Perry Ellis, Swim, Gold, Hispanic and other initiatives. Today private label represents less than 19% of our total revenues, down from 25% only two years ago. Our target is to reduce private label to approximately 15% of revenues going forward and we expect the decline to continue this year particularly on the replenishment bottoms business. As retailers started planning inventories down during Q4 of last year we have adjusted our businesses accordingly for fiscal 2009.

Talking about our brand, Perry Ellis continues to gain market share in department store channels. To achieve this, our design and merchandising and planning team did an outstanding job throughout 2008. Not only did Perry Ellis collection have another phenomenal year of growing revenues over 18%, but we were leaders in multiple categories according to the latest NPD report.

Also according to NPD data, Perry Ellis overall grew over 11% at retail together with Calvin Klein Sportswear. We were the only two brands who increased revenues and market share last year.

We continue to see tremendous opportunity to grow our Perry Ellis brand, both through our retail platform and through our new categories developed both internally and the licensing partners.

One of our core competencies is our ability to identify and develop underserved niches. Our Golf lifestyle is a major success story for our company as a confirmation of this competency. Our Gold brands, Ping, PGA Tour, Champion Tour and Grand Slam grew a combined 44% during fiscal 2008. This outstanding performance created new opportunities at department store channels through new Golf brands at Golf, at Belks and Dillards.

During fourth quarter we successfully launched a Pro Tour Golf brand at Belks. This spring Pro Tour is expanding into 309 doors. Meanwhile for Dillards we are producing a full Golf line under the Roundtree and Europe label distributing at 319 doors nationwide next month.

Another niche business that continues to expand is our Hispanic lifestyle. This spring both Cubavera and Havanera increased door penetration. Cubavera is available in over 700 doors at department store channels while Havanera is exclusive at 560 JCPenny doors. Our success in the Hispanic lifestyles continued this spring with the launch of Centro, a new brand available exclusively at Kohl’s. Centro was launched at 128 doors and has performed over 60% ahead of plan. Kohl’s has already committed to expanding to another 66 doors by August and we are priming already to reach almost 300 doors by fall of this year.

Our Swim platform continues its strong momentum. Last year we grew our business over 40% with Nike alone reaching almost $50 million in revenues. With the current swim season which runs from Q4 of last year to Q2 of fiscal 2009 we have experienced a strong 12% revenue increase over last year’s fourth quarter results led by the Nike, JAG, Janssen and positive performance of the Swim brand at the mid-tier channel.

In the Action Sports arena we are particularly optimistic about the potential of our Gotcha surf brands for next year.

Both domestically in initial shipments to over 100 doors in Kohl’s coming this spring season and internationally with our new operations in Biarritz, France, we also are excited about the strong performance of the Redsand brand in Action Sports in department store channels.

Boy’s wear is a new opportunity for fiscal 2009. Our recently created division will allow it to expand as one of the fastest growing categories in the market such as Boy’s Contemporary. In the fall we will be launching our collection under the Original Penguin brand at better department stores such as Nordstrom’s, Bloomingdale’s and Fred Segal’s to name a few and Perry Ellis America department stores for holiday 2008.

Turning to our recently acquired Women’s Contemporary business I am very proud of the progress that we have made on the integration of C&C of California and Laundry into the Perry Ellis family. We are extremely happy with many of the talented and motivated individuals that these businesses brought to us. We see innumerable opportunities and a strong potential in both of these brands to successfully grow our Women’s business to the $150 million level within the next five years.

However, some changes were necessary to fully realize that potential. Particularly at Laundry we have decided to bring back Laundry’s Brand Heritage and recapture its west cost roots. Our first step was to move all Laundry design back to Los Angeles where it was originally bought. Laundry continues to resonate strongly with a large group of loyal followers who made it a $100 million brand just a few years ago.

We believe that the changes with increased management attention can put it at that level a gain in the not too distant future.

Looking into the future we are off to a strong start in fiscal 2009. No one is immune to the macroeconomic environment. However, we believe our diversified strategy, powerful national and international brands, and our ability to identify and develop niche businesses provides us with strong growth potential.

Let me show you some key drivers of our growth during fiscal 2009. First, our Perry Ellis brand is projected to grow in the high single-digit range driven by expanded [force] place in department store channels.

Second, we expect mid-teen growth in our niche businesses Golf and Hispanic attributed to the new initiatives that we have previously discussed.

Third, Swim is performing very well and during the first months of the Swim season and is expected to continue last year’s strong momentum. Plus Gotcha and Redsand potential which should lead to a low, mid-double digit growth for this year.

Fourth, our new business. Contemporary Women’s through Laundry and C&C of California and Boy’s through Original Penguin and Perry Ellis America are expected to add between $50-60 million in highly profitable revenue this year.

Fifth, we expect another year of double-digit growth from our Perry Ellis retail driven by the annualization of last year’s new doors, increased productivity in existing doors and the addition of ten new doors this year.

Finally, we expect our International operations both through our UK and Biarritz offices and through our licensing partners to continue their rapid expansion in the Asian and European markets.

We want to thank again our shareholders for their support during last year and reiterate we are confident on our ability to deliver on our strong potential for fiscal 2009 and beyond.

Now I would like to turn over the call to Tom D’Ambrosio who will discuss our financials.

Tom D’Ambrosio

Thanks Oscar.

Our fiscal 2008 revenues grew to a record level of $863.9 million, a 4.1% increase over fiscal 2007 revenue of $829.8. We experienced increases across multiple business units including Swim, Perry Ellis Collection, Golf, Hispanic and direct retail business.

Our fourth quarter revenues were $212.3 million, an 8.3% decrease over the fourth quarter of fiscal year 2007 revenue of $231.6 million. We are in line with management’s expectations.

As previously mentioned this decrease was due primarily to a $20 million reduction in the bottom’s replenishment program and exit of certain mass merchant private label business.

Our year-to-date fiscal 2008 gross profit margins were 33.8%, an increase of 52 basis points over fiscal 2007’s 33.2%. This increase is attributable to the company’s focus on higher margin branded business.

Fourth quarter fiscal year 2008 gross profit margins were 35.4%, an increase of 128 basis points over fourth quarter fiscal 2007 34.1%. The increase over the last year was positively impacted by the reduction of the bottom’s replenishment program and exit of the certain mass merchant private label businesses as previously mentioned.

Total SG&A for fiscal 2008 was $215.9 million, which is slightly higher on a rate basis than 2007. This was primarily driven by our continuing investment in our Boy’s Division, Action Sports, retail and certain one-time costs associated with the implementation of our [retech] system.

Total SG&A expenses for the fourth quarter were approximately $51.8 million compared to the fourth quarter of fiscal year 2007 of $53.4 million.

Fiscal 2008 EBITDA grew to a record $75.8 million, a $4.9 million or 6.8% increase over fiscal 2007 levels and EBITDA margins improved 22 basis points to 8.8% of revenues.

Interest costs during fiscal 2008 were $7.6 million, a $3.5 million reduction from last year. Interest was lower than last year as a result of our strong cash flow whereby we reduced overall debt by approximately $62 million versus last year and the benefit of actions taken during fiscal 2007 to reduce our cost-to-capital such as the March payoff of our 9.5% senior secured bonds.

We ended fiscal year 2008 in excellent shape from a liquidity purchase with zero dollar borrowings on our $175 million facility and $13 million of cash on our balance sheet.

Overall, long-term debt at the end of the year was $175 million which is $237 million at January 31 fiscal year 2007. That represents a $60 million reduction and our long-term debt to total asset ratio declined to 30% compared to 40% as of January 31.

The significant reduction is a testimony to our ability generate significant cash flows from operations.

Our tight control of inventory planned resulted in inventories at January 31 of $136.4 million. That is a 2.3% decrease to last year’s $139.7 million while our sales have increased by 4.1%.

Accounts receivable were $138 million as of January 31, a $19 million reduction over last year’s level of $157 million and in line with our fourth quarter sales reduction over prior year.

Receivable levels continue to be well managed and our DSO as of January 31 was approximately 67 days, relatively flat to last year.

During the fiscal year 2008 we incurred approximately $19 million of capital expenditures in technology and systems, retail stores and various other expenditures.

Our depreciation expense for the year was $13.3 million versus $11.6 million for fiscal year 2007. The increase in depreciation expense of last year was primarily driven by our [retech] inventory systems going online and our continued expansion into retail.

With respect to our view on fiscal 2009 performance, as indicated in our release we are anticipating revenues to grow in the 5-7% range or the $910 and $925 million range and our earnings-per-share growth in the $1.95 to $2.00 range which represents an 8-11% increase over fiscal 2008 .

In summary, we are very pleased with our results for fiscal 2008 and believe the majority of our brands and businesses are positioned for growth in fiscal 2009 and beyond.

With that we will open the call up to questions. We ask that you limit your questions to the limited time so that everybody has an opportunity.

Question-And-Answer Session

Operator

Thank you sir. Today’s question-and-answer session will be conducted electronically. At this time if you do have a question you can signal by pressing *1 on your touchtone phone. If you are using a speakerphone today please be sure your mute function is turned off to allow your signal to reach our equipment. Once again please press *1 if you do have a question at this time.

Our first question is from Jody Kane with Sidoti & Company.

Jody Kane - Sidoti & Company

Thanks. Can you talk a little bit about the Centro brand and how that is doing?

Oscar Feldenkreis

The Centro brand is doing very good at Kohl’s. It is in about 128 doors currently today and in August will be rolling out to an additional 66 doors. We feel that is a great platform for us. It is a full collection of products. It is the highest retail product being sold today in their stores. It will be in about 300 doors come the fall holiday season.

Jody Kane - Sidoti & Company

Could you just talk a little bit about what you think is allowing you to take market shares? Is it marketing? Is it design? I’m just trying to get an idea of why you are winning when others are losing.

Oscar Feldenkreis

I think it is several reasons. Number one it is great product. Being attuned to what the consumers want. Being able to bring product quicker to market, maybe that some of our competitors or even the private label sector is. I believe our initiatives with Oracle, the planning side and deploying people to Asia to focus on speed to market is paying off.

Jody Kane - Sidoti & Company

Alright. I’ll jump back in the queue. Thanks.

Operator

The next question comes from the line of Jeff Mintz with Wedbush Morgan Securities.

Jeff Mintz - Wedbush Morgan Securities

Thanks very much. When you had initially announced the C&C and Laundry deal you had talked about $60 million in incremental revenue from those businesses in fiscal 2009. Now you are talking about $50-60 and adding in the Boy’s business. Can you talk about what has changed since you have now acquired the business and where you outlook has changed on that?

George Feldenkreis

When we announced the deal it was some time in November and all the figures that we were using were really coming from [inaudible]. As we closed on the business in February and we analyzed what they have on the books actually, the numbers were closer to $50 million than the $60 million we believed were going to be available at that time. So we are taking a conservative approach on going back to that and going back to $50 million rather than to $60.

Jeff Mintz - Wedbush Morgan Securities

Was the lower numbers in one of the businesses or the other? Or was it kind of a little bit on each of them?

Oscar Feldenkreis

Jeff I would say that it is leaning more towards the Laundry side but of course that could very much change based on the new design team we have implemented in California. I have been spending a lot of time in L.A. and going back and forth and I feel very confident that for holiday and going into our fourth quarter when we might be able to see some further upside.

Jeff Mintz - Wedbush Morgan Securities

So the new design team, their designs will be in effect for the holiday season for you guys?

Oscar Feldenkreis

That’s correct.

Jeff Mintz - Wedbush Morgan Securities

Thanks very much.

Operator

Just as a reminder. If you do have a question at this time you may signal by pressing *1 on your touchtone phone.

The next question comes from the line of Andrew Berg with Post Advisory Group.

Andrew Berg - Post Advisory Group

Hey guys. A couple of housekeeping questions. Can you tell me what CapEx was for the year?

Oscar Feldenkreis

$19 million.

Andrew Berg - Post Advisory Group

Okay. And you said that you had nothing drawn on your revolver but I’m sure you have some LCs against it. Can you tell me what the availability was at your end?

George Feldenkreis

At year end we weren’t borrowing anything. The revolver availability was in the $175 million range.

Andrew Berg - Post Advisory Group

Okay.

George Feldenkreis

Today we are borrowing, including the $34 million, we are borrowing a net of $86 million. Availability would be in the over $100 million range.

Andrew Berg - Post Advisory Group

Okay. When you think about your growth for the year that you talk about, the 910 to 925, how much of that should we think about is growth from royalty income as opposed to just net sales of product?

George Feldenkreis

Growth in royalties was only $3 million last year. The company grew $34 million. Royalty was $3 million.

Andrew Berg - Post Advisory Group

So we shouldn’t think of the royalty pieces growing a whole lot more than we saw last year?

George Feldenkreis

We expect that this year to be based on all the agreements that are in place. The new licensees, yes.

Operator

The next question comes from the line of Robin Murchison with Suntrust Robinson Humphrey.

Robin Murchison - Suntrust Robinson Humphrey

Hey, good morning. A couple of questions. One if Tom maybe you could explain the payables to inventory increase at the end of the year. The second question would be, if you could just give us your assessment of the environment – if there is any change and if there is not? Assessment of the current environment contrasted to the November/December time frame and what you were thinking at that point. Thank you very much.

George Feldenkreis

You’re looking for the number?

Robin Murchison - Suntrust Robinson Humphrey

Payables to inventory were about 38% at the end of the year versus 31.5% at the end of the prior year. It looks as if your payables were up a little.

Tom D’Ambrosio

Okay. Part of that is the shift is on payables because we didn’t...it was a movement from borrowing. Since we didn’t borrow any money there is always some short-term payable recording as we have the inventory coming in. So it was just a short-term at the end of the year.

Robin Murchison - Suntrust Robinson Humphrey

Okay thanks.

Operator

The next question comes from the line of Jeff Mintz of Wedbush Morgan.

Jeff Mintz - Wedbush Morgan Securities

Hi. Just a couple of number questions. Do you have the sales per square foot numbers for both the outlet and the Original Penguin stores in 2008?

Oscar Feldenkreis

Penguin is on an average for all the five stores is between 700 and 750 and for the outlet stores is about $400.

Jeff Mintz - Wedbush Morgan Securities

That outlet number is up from about $350 the prior year, right?

Oscar Feldenkreis

That’s correct. That’s really better performance. More product specific for the stores. And the [retech] system that we implemented from Oracle has helped us to deliver products to specific store needs and allocate the product more to sizing and color needs.

Jeff Mintz - Wedbush Morgan Securities

Great. Do you have any CapEx planned for 2009 that you can share with us in terms of approximately dollar amount?

Tom D’Ambrosio

Jeff right now we’re looking at probably around $15-16 million.

Jeff Mintz - Wedbush Morgan Securities

Great. Thanks very much.

Operator

The next question comes from the line of Jody Kane with Sidoti and Co.

Jody Kane – Sidoti & Co.

Can you talk about how the bankruptcy of one of your swim competitors is helping you?

Oscar Feldenkreis

Excuse me?

Jody Kane – Sidoti & Co.

Previously you had spoke about a swim competitor that has gone bankrupt. I think it was in Canada. I was just wondering how that is affecting this year versus last year?

Oscar Feldenkreis

It is playing out to be very favorable to us because we have hired a lot of the sales organization that used to do that business and we feel that some of those opportunities that were being done through this company are moving in our direction. It is also important to note that a business that operates on a five month basis is very difficult to manage today on a profitable level year around so more and more retail companies are looking to partner up with strong companies that have the ability to finance and manage a strong business. Also what we have done is added a strong component to the cover up business which today is probably 20% of the total business.

George Feldenkreis

By and large, besides Baltics that was a major vendor that went bankrupt they were acquired by another company and are reorganizing. One [inaudible] like Nautica, Catalina and they have opened the space to others. Except for [inaudible] and others we are the only ones that have the public persona. All of the other companies are private companies and it is becoming more and more difficult for private small companies to compete in this environment when the swim business you invoice for five months but they have expenses for twelve. So all of this is a plus. The whole swim business is becoming an import business and we are much better prepared than smaller companies to compete with products made in the orient.

All in all it is a very favorable situation. The Nike major competitor in this field announced that their sales for last year dropped by $30 million. So that is opening additional space on the Nike side of the business.

Jody Kane – Sidoti & Co.

So it sounds like you feel better about the Swim business, or feel better about it or good about it for this year compared to last, even though last year was a good year. How does this break out between the first and second quarter? How should we look at that?

George Feldenkreis

Swim is definitely a Q4 and Q1 business. So we have the benefit in Q4 over last year and now we are having the benefit in this first quarter, which is our best quarter in Swim. We have a second and third quarter where generally you definitely lose money in Q3 and the best you can hope for is to come out even for Q2.

Jody Kane – Sidoti & Co.

Great. Then just as far as the free cash flow, are you planning to reduce debt, make acquisitions, acquire shares, and maybe introduce a dividend or something like that?

George Feldenkreis

We are not in the dividends. Except for the Chairman we are a very young company looking for growth and acquisitions.

Operator

The next question comes from the line of Phyllis [Cammara] with Paxworld Funds.

Phyllis [Cammara] - Paxworld Funds

Hi. Thank you. Can you talk a little bit about the bottom’s business? Are you out of that completely or are you at a run rate where you feel comfortable for the rest of the year? And then also are you complete out of the mass merchant private label program for the…will we be seeing anything in it for the first quarter?

Oscar Feldenkreis

The answer, Phyllis, is we are still in the bottom’s business. It is a very, very important part of our business. The piece that is really suffering is the mass merchant private label business more than anything. As retailers reduce their levels of inventory due to the environment it has caused us to reforecast our plans going into 2009. We are definitely not out of that business at all. It really has been more affected on the mass side of the business versus our business with JCPenny, and Dillards and Belk is still strong when it comes to the private label bottom’s business. When it comes to the total bottom’s business, our business under the Perry Ellis brands, under the Exist brands, even the private label business that we do with Kohl’s continues to outperform and we continue to look for further growth in that area may it be from a branded side.

Phyllis [Cammara] - Paxworld Funds

Okay thank you.

Operator

The next question comes from the line of John [Kurdy] with Principal Global Investors.

John [Kurdy] - Principal Global Investors

Just a little bit of a follow-up on the previous question. On the fourth quarter you talked about the negative impact of some of the replenishment business being scaled back by some of your customers, as well as exiting mass merchant market for about $20 million. I was wondering if you could give us a little more color on what that was for the entire year of fiscal 2008 and how much of an impact on fiscal 2009?

Oscar Feldenkreis

Basically it has been a lot of the Wal-Mart programs that have gone predominately directed. It is really about total exiting from fiscal 2008 this past year is about a $23 million hit in total bottoms. I feel very, very comfortable with the business that is currently being done may it be branded or private label is very secure, still seeing growth and we don’t see any reason to think that the business is going to get worse at all. I think that the hit which is predominately the Wal-Mart private label bottom’s business has already been affected which I would also like to mention is the lowest margin business. So where the revenues were large the profitability’s were also not as good as other ones.

John [Kurdy] - Principal Global Investors

But in terms of the ongoing impact, maybe like even in the first half of this year that is rather minor so that the overall revenue growth that you were talking about for the year for fiscal 2009 has not really been impacted to a large degree by continuation of those reductions?

George Feldenkreis

No, we have taken those reductions into consideration. So the numbers that we are giving you are met after considering…another issue to consider from a fashion standpoint remember that pants are the more basic of the items a man can buy in a store and when the economy slows down that is the first item that people can postpone until later. So we have factored in the numbers for the basic business to continue being relatively…no gross lost in sales.

John [Kurdy] - Principal Global Investors

Lastly, how many new stores were planned in 2009 in terms of both Penguin and outlet?

Oscar Feldenkreis

Penguin we have one now signed in Chicago off of Rush, right next door to the [inaudible] store right across the street from Barneys. The Perry Ellis stores we have ten. Of course we are always looking for additional locations. We will be attending the [inaudible] show in Vegas in May, but of course we’re looking at what are the best locations today.

Operator

The next question comes from the line of Steven Martin with Slater Capital Management.

Steven Martin - Slater Capital Management

Great quarter and great guidance guys. I got on a little late. I was wondering if you made any comments on the share buyback? How many you bought and the average price?

George Feldenkreis

We bought about 300,000 unit shares at about $15.

Steven Martin - Slater Capital Management

And what was the actual share count outstanding at the end of the quarter?

Tom D’Ambrosio

15,165.

George Feldenkreis

15,165.

Steven Martin - Slater Capital Management

Alright. Thanks a lot guys.

Operator

And there appear to be no other questions at this time. I will turn the call over to Mr. George Feldenkreis for any additional or closing comments.

George Feldenkreis

Thank you very much to you all and thank you for your support. We continue to work very hard to make your investment worthwhile and our work worthwhile for the benefit of our associates and every body else concerned. We are still very hopeful that this is going to be a record year for us and we are working to that end. I thank you all.

Operator

Again, that does conclude today’s conference call. We thank you for your participation and you can disconnect at this time.

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