Lifetime Brands, Inc. Q1 2008 Earnings Call Transcript

| About: Lifetime Brands, (LCUT)

Lifetime Brands, Inc. (NASDAQ:LCUT)

Q1 2008 Earnings Call

May 8, 2008 11:00 am ET


Harriet Fried - Investor Relations

Jeffrey Siegel - Chairman of the Board, Chief Executive Officer and President

Laurence Winoker - Senior Vice President - Finance, Treasurer, and Chief Financial Officer

Christian G. Kasper - Senior Vice President - Strategy and Corporate Development


Alvin Concepcion – Citigroup Global Markets

Bill Chappell - Suntrust Robinson Humphrey


Welcome to the Lifetime Brands first quarter earnings conference call. At this time, all participants are in a listen-only mode. Following management’s prepared remarks, we’ll hold a Q&A session. (Operator Instructions) As a reminder, this conference is being recorded today, Thursday, May 8, 2008. I would now like to turn the conference over to Ms. Harriet Freed.

Harriet Freed

Thank you, Operator. Good morning, everyone, and thank you for joining Lifetime Brands’ First Quarter 2008 conference call. With us today from management are Jeff Siegel, Chairman, President, and Chief Executive Officer; Larry Winoker, Senior Vice President and Chief Financial Officer; and Chris Kasper, Senior Vice President, Corporate Development. Before we begin, I’ll read the Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995.

The statements that are about to be made in this conference call that are not historical facts are forward-looking statements and involve risks and uncertainties, including but not limited to, product demand and market acceptance risks, the effects of economic conditions, the impact of competitive products and pricing, product developments, commercialization, technological difficulties, capacity constraints or difficulties, the results of financing efforts, the effect of the company’s accounting policies, and other details contained in its filings with the SEC. The company undertakes no obligation to update these forward-looking statements.

With that introduction, I’d like to turn the call over to Mr. Siegel. Please go ahead, Jeff.

Jeffrey Siegel

Thanks, Harriet. The first quarter of 2008 was one of the most difficult periods for retailers that I can remember. Given the environment, most retailers cut back on purchases with had a negative effect on our wholesale business which was down by about 10% compared to last year. While it may be premature to say that the worst is over, I can tell you that since early April, our order flow has turned around and as of right now it appears that our wholesale sales for the second quarter will exceed last year’s. As the magnitude of the slump in overall retail sales became apparent, many retailers in effect wrote off the spring season ad began aggressively to focus on the fall.

While we expect retailers to continue to be cautious, the ongoing collaborative planning process between Lifetime and our retail partners leads us to believe that we should have a strong second half of the year. This will be driven by a combination of new product introductions as well as very strong promotional offerings that can drive retail sales, especially in the last six weeks of the year.

As business slowed in the fourth quarter of 2007 and the beginning of the year, we began working with our key suppliers to develop strong promotional offerings in all of our product categories. As a result, we are in a good position to capitalize on retailers’ fall promotions. As I mentioned in this morning’s release, product innovation is especially important during periods when consumer spending is constrained. When business is tough, retailers rely on those vendors who can offer great products at exceptional values. Lifetime offers both the innovation and promotions they need. With those overall comments on our approach and strategy, let me give you an update on some of Lifetime’s key initiatives.

First, we introduced our new environmentally-friendly kitchenware products at the International Home and Houseware Sale in Chicago and the reception was outstanding. Eco-friendly products are one of the fastest-growing, most dynamic sectors of the economy. Our products are made from a bio-plastic blend that contains significantly less petroleum than ordinary plastics. Unlike some other materials, they’re completely safe for use with food, and though they’re dishwasher safe and will withstand years of use, at the end of their lifecycles, the products are also recyclable.

Our first products under the EcoWorld, EcoLife, and Pedrini Eco trademarks will be available at retailers in the fourth quarter. After that, we’ll build on our core assortment by offering products in many of our other categories. Our green product lines have a multi-brand strategy so we will be able to be offer it to all of our retail customers at every level.

Second, we’re making good progress with our launch of Vasconia brand, one of Mexico’s best known brands. In 2007 we identified the US Hispanic consumer as a fast-growing but underserved segment of the population and we’ve developed a line of more than 150 products targeted to this market. Our product offerings cross multiple categories of business and provide programs to every level of retailer. Placement starts this quarter and has been running ahead of our original expectations.

Third, our entry into the fast-growing category of waste management is going well. We’re offering exclusive designs and exclusive features such as child- and pet-friendly locking lids, a line that prevents suction between the garbage bag and the liner, and front and back handles and wheels for easy moving and cleaning. We expect these advantages, combined with sleek styling, competitive pricing, and universally recognized brands, to put us in the forefront of the category.

I would also like to update you on the progress we are making in our dinnerware business. In the second half of last year our dinnerware business performed far worse than our other wholesale businesses. New management took over in January and though they were not on board long enough to make much of a difference in the first quarter, they are on track to move sales up considerably starting in the second quarter. Glen Simon, the new division president, has put together a first-rate group of experienced professionals to run the business and they’ve already gained significant new placement for the second half of the year.

I also want to give you a quick update on some operational matters before turning the call over to Larry and Chris. In our direct-to-consumer or DTC business, we completed the closing of the 30 stores we targeted because they didn’t make a profit. We expect the closings alone to improve profitability by about $2 million. Our remaining stores are doing well. Same-store sales in continuing locations were up 3.3% in the first quarter and were up about 2% in April.

The internet and catalog business was up about 13.5% in the first quarter. The consolidation of our warehouses in Southern California is continuing on plan and we finalized a strategy to improve the efficiency of the York, Pennsylvania distribution center that came with the Pfaltzgrapf acquisition. In addition, our inventory reduction initiative continues to make progress. As of March 31st, inventory levels were at $137 million which is $17 million below the prior year. Chris will give you details on these matters later in the call. The restructuring of the directed consumer business resulted in a $2.9 million non-recurring charge in the first quarter. The consolidation of the west coast distributions facilities forced us to incur an additional one-time expense of $1.5 million. We expect the consolidation of the facilities to be substantially completed by the end of June.

We’ve given a lot of thought as to whether we should change our guidance for the full year of 2008 for our financial results. It would be easy to infer from our first quarter results that our year will be disappointing; however, when we look at our current sales trend for the second quarter and how the company is positioned for the fall, we believe that we can make up the shortfall we experienced in the first quarter. As a result, we are maintaining our guidance for 2008. Of course, this would change if the economy were to continue on a downward slope.

I’d like to now turn the call over to Larry to provide more details on our first quarter numbers.

Laurence Winoker

Thanks, Jeff. Net sales for the first quarter of 2008 were $98.2 million, a decrease of 5.4% from the 2007 period. Net loss was $6 million or $0.50 per diluted share for 2008 compared to a loss of $1.3 million or $0.10 per diluted share in the 2007 period. For our wholesale segment, net sales were $80.4 million for the first quarter of 2008, a decrease of $8.8 million from the 2007 period. This decline in sales volume primarily occurred in the tabletop and home décor categories. We believe the most significant factor contributing to the segment’s overall decline was the extremely challenging retail sales environment. In the direct-to-consumer segment, net sales were $17.8 million for the 2008 quarter, an increase of 21.9% from the 2007 period. This increase was driven primarily by our going out of business program for the previously announced closing of 30 underperforming stores.

Catalog and internet sales increased due to the successful spring catalog and the late holiday orders in 2007 that were shipped in January 2008. Comparable store sales also showed an improvement. On a consolidated business, cost of sales for the first quarter of 2008 was 60.7% of sales compared to 58.9% in 2007.

Our wholesale segment cost of sales was 63.2% of sales in 2008 quarter compared to 62.2% in 2007. This increase was due to our continued effort to reduce inventory levels and higher sales allowances. In the direct-to-consumer sales, cost of sales was 49.3% in 2008 compared to 38.7% in 2007. The increase as a percent of sales primarily resulted from lower margins from the going out of business program and to a lesser extent promotional activity in our ongoing stores.

Distribution expenses were $13.4 million or 13.7% of sales in the 2008 quarter compared to $13.3 million or 12.8% of sales in 2007. In the wholesale segment, distribution expenses increased to 12.7% in 2008 versus 11.1% in 2007. As Jeff noted, the increased percentage primarily resulted from the integration expenses of consolidating into our new west coast distribution center. Excluding the integration expenses, distribution would have been a 10.9% of net sales. For the direct-to-consumer segment, distribution was 17.4% of sales in the 2008 quarter compared to 23.3% in 2007. The decreased percentage was primarily due to reduced third-party warehouse costs as a result of planned decreases in inventory levels and improved labor efficiency.

Selling, general, and administrative expenses for the 2008 quarter were $31.1 million, an increase of 4% over 2007. Excluding unallocated corporate expenses, SG&A was $28.5 million in 2008 and $27.9 million 2007. Increases attributable to the amortization of our SAP enterprise system and lease hold improvements for our new headquarters was partially offset by the elimination of [inaudible] expenses of our former headquarters and expense reduction efforts in the direct-to-consumer segment.

In addition, SG&A reflects the expense of trade credit risk protection we obtained to offset our risk associated with Linens N Things. Unallocated corporate expenses for the 2008 and 2007 quarters was $2.6 million and $2 million respectively. This increase is primarily due to higher professional fees and stock option expense.

During the first quarter of 2008, we recorded a charge of $2.9 million for restructuring expenses relate to the planned closing of 30 underperforming stores. These charges were primarily for the lease obligations related to the closed stores. Loss from operations for the 2008 quarter was $8.8 million compared to $552,000 in 2007. In our wholesale segment, income from operations was $345,000 in 2008 and $5.6 million in 2007. In the direct-to-consumer segment, loss from operations was $6.5 million for the 2008 quarter and $3.6 million excluding restructuring expenses versus $4.1 million in 2007.

Interest expense for the 2008 quarter was $2.1 million versus $1.5 million in 2007. The increase was attributable to higher borrowings under the bank credit agreement which was partially offset by lower interest rates. Our income tax rate was 42.5% for the 2008 quarter versus 38.5% for the 2007 quarter. The increase is principally due to stock option expense as it is not deductible for income tax purposes.

Now turning to the balance sheet, our inventory reduction effort continues to show progress. Quarter-end inventory was $136.9 million which is $6.8 million lower than at year end and $17.6 million lower than at March of ’07. At March 31, 2008, our bank borrowings were $73.9 million, an increase of $5.2 million from year-end 2007. This compares to an increase in borrowing of $21.3 million in the 2007 period. While 2007 was burdened by $4.8 million in higher capital expenditures and acquisitions, this improvement especially reflects our management of inventory levels. We currently expect capital spending for 2008 to be approximately $8.5 million.

We recently amended our credit agreement to provide for additional seasonal borrowing capacity. At April 30 of 2008, availability under our bank credit facility was approximately $35 million.

Now I’ll turn the call over to Chris.

Christian G. Kasper

Thanks, Larry. My remarks this quarter will highlight our progress in four areas: the direct-to-consumer division, our distribution strategy, our inventory reduction initiative, and our recently announced Canadian strategic alliance.

Turning first to DTC: as Jeff mentioned, in December of 2007 we announced our plan to close 30 outlet stores for approximately 40% of our total retail doors as part of our restructuring initiative. As of March 31st, all 30 stores were closed. We expect these closures and the associated reduction in divisional overhead to improve profits by approximately $2 million on an annual basis beginning in the second quarter. We’re pleased to report the going out of business sales were a success and we realized a 28% margin on the approximately $5 million in inventory liquidated through the sales. Our efforts at lease mitigation were also successful. We’re now estimating that the $4.2 million in lease obligations will be terminated at a cost of $2.3 million.

In the first quarter we spent $2.9 million of restructuring expense and are confident that it will total less than our original $5 million estimate on a full-year basis. We continue to believe that the restructuring initiatives, coupled with the comp store sales growth and organic growth in the web and catalog business that Jeff mentioned will result in a substantial improvement in the division’s profitability. We expect all our remaining retail stores to show a four-wall profit in 2008. However, until the completion of the York warehouse restructuring initiative which I will discuss in a minute, the stores are likely to operate at a loss on a fully burdened basis for 2008. As previously noted, at such time as we were to conclude that our retail stores cannot achieve an acceptable level of profitability, we would pursue other strategic alternatives with respect to those locations.

Moving to our distribution strategy: as previously announced, we are in the midst of consolidating our three distribution facilities in Southern California. The final result will be a single, efficient, 753,000 square foot facility located in Fontana, California. We are pleased to report that we’ve started shipping from the new Fontana warehouse and have vacated one of the two previously existing facilities that had been run by a third-party logistics provider. We are also on plan to vacate the company run Mira Loma facility by June 30th. As mentioned in this morning’s press release, the company incurred approximately $1.5 million equal to $0.07 per diluted share in added distribution expense in the first quarter attributable to the operation and integration of the three California distribution centers. Going forward, we expect the consolidations to result in $1 million in annual pro-forma savings starting in the third quarter of 2008.

The next phase in our distribution strategy addresses our York distribution center which currently operates our wholesale dinnerware and DTC businesses. The lease for the center which we inherited during the Pfaltzgrapf acquisition will expire on July 31, 2009. We’ve defined our near-term strategy for this facility and are in the process of implementing it now. We’ll be consolidating the wholesale dinnerware business into the Fontana facility and right-sizing the York distribution center to meet the future needs of the DTC division. In addition, we’ve been focused on improving the efficiency of its operations and were recently able to reduce the staffing level by 30 FEEs due to efficiency gain. These changes should have a meaningful impact on the profitability of both the dinnerware and DTC businesses in 2009.

We are also very pleased with the progress we’ve made in continuing to reduce inventory levels and increase inventory terms. At March 31st, inventory levels were $137 million which is $17 million below the level at March 31st, 2007. Adjusted for acquisitions, inventory levels as of March 31st were $22 million below the prior year’s levels. A significant portion of the reduction was a result of improvement in the most recent quarter when we reduced inventory by $7 million compared to a reduction of only $1 million in last year’s first quarter. Excluding the effect of the going out of business sales, the reduction in the first quarter was $4 million. At the same time we are reducing inventory, we are also changing the way we order and manage our inventory so that sales will not be negatively impacted. These profits improvements, coupled with extensive employee training, have resulted in our inventory planning accuracy, improving from 58% to 72% in the last year. As we’ve previously stated, we expect the changes in working capital and other operating assets and liabilities will be a source of at least $5 million in cash for 2008.

Finally, I’d like to note that we have finalized our strategic alliance with the Accent-Fairchild Group to grow our business in the Canadian market. AFG will combine its food preparation, tabletop, and home décor business with that of Lifetime Brands and operate as a single business under the name LTB Canada. We expect AFG’s focus on the Canadian market and deep relationships with the key Canadian retailers to substantially increase the size of the business. As part of the agreement, AFG will take over all direct responsibility for the business and has committed itself to invest in staff and resources to grow it. Lifetime will participate in the profits of LTB Canada and will also have the right to acquire that business at defined periods beginning five years after the date of the agreement.

While Canada is a small market compared to the US, the strategic alliance with AFG, like that with Ecko in Mexico, provides opportunities for us to expand Lifetime’s geographic footprint, build consumer recognition of our brands, and become a more important supplier to our retail customers.

Operator, we’re now ready to take questions.

Question-and-Answer Session


(Operator Instructions) Your first question comes from Alvin Concepcion – Citigroup Global Markets.

Alvin Concepcion – Citigroup Global Markets

I just wanted to talk about the guidance for the year a little bit. It was --

Christian G. Kasper

Alvin, excuse me. Would you please speak up, we’re having difficulty hearing you.

Alvin Concepcion – Citigroup Global Markets

Sure, I just wanted to talk about the guidance a little bit. It was 105 to 125, that’s excluding the DTC restructuring. Does that also exclude the consolidation of the west coast distribution facilities? The $0.07 that you got impacted by?

Christian G. Kasper

No, it does not.

Alvin Concepcion – Citigroup Global Markets

Just to make sure, there’s about $0.05 left of restructuring in the DTC?

Christian G. Kasper

We had estimated the DTC restructuring expense in total for the year 2008 to be $5 million. Year to date that number is substantially less than that but there are remaining expenses that will be incurred associated with the closing of the stores as previously announced so at this point we are still anticipating $5 million in total restructuring charges.

Alvin Concepcion – Citigroup Global Markets

Could you comment on your inventory levels at retail, your level of comfort with them?

Jeffrey Siegel

The inventory levels at retail are low. They’re much lower than they were at the same point last year.

Alvin Concepcion – Citigroup Global Markets

And then going into the Vasconia product, how large do you think that opportunity is?

Jeffrey Siegel

We’ve never given out the number and we still are reluctant to do so. We are getting terrific placement. We have national chains on board. It’s going to be a very important brand for Lifetime but I don’t want to go into any numbers at this point.


Your next question comes from Bill Chappell - Suntrust Robinson Humphrey.

Bill Chappell - Suntrust Robinson Humphrey

First a basic question. It said I think in the press release you’re expecting 4,000 new products this year. I think if I remember, the button from the houseware show was like 2500, 2600 new products. Have you stepped up that since the houseware show even further or is it just a different number?

Jeffrey Siegel

The largest number of new products are introduced in the first quarter of the year, that’s when we get placement for the year. I would say the number this year would be more than 4000 but we haven’t put out a new number.

Christian G. Kasper

But Bill, to your point, I think it’s important to note that we’ve accelerated the development of new products and the timing of new product introductions earlier in the year to get more bang for the buck so to speak out of sales of products later in the year, so I do think that that’s an important point to note.

Bill Chappell - Suntrust Robinson Humphrey

And then in terms of the dinnerware business, can you talk to us a little bit more about profitability this year, can we get back to profitability? You shrink the losses from last year and maybe talk a little bit more about what gives you confidence there?

Jeffrey Siegel

It’s difficult to give a real number. I can tell you there’s going to be a dramatic turnaround, truly dramatic turnaround. Starting in this quarter, top line sales in this quarter look like they’re going to be terrific. We have tremendous placement in customers that we had even no placement or negligible placement last year. We’re making great progress and in addition to that, we’re already starting the process towards 2009 and opening a lot of doors for 2009 as well so I don’t want to put a number on it but there will be a dramatic turnaround in that division. We’re very happy with the way the business is going.

Bill Chappell - Suntrust Robinson Humphrey

And help me to understand that. Is that just management focus, is it design, is it better retail relationships? Why such a change?

Jeffrey Siegel

More than anything else, it’s management who really understands the design of products that are necessary to do business today. Dinnerware is driven more by the style of the product than by anything else. Brands are very important but the style of product is everything. A consumer is not going to buy a pattern of dinnerware if she doesn’t like it, no matter what the brand is. The current management that’s in place, Glen Simon and his team, have experience. They were extremely successful in the past with dinnerware and they’re just doing a phenomenal job today.

Bill Chappell - Suntrust Robinson Humphrey

And then just finally on China manufacturing, is there any way to quantify your cost increases as you’re looking at it with the VAT tax and other things going on there?

Jeffrey Siegel

There have been many increases, probably starting about 18 months ago, between raw materials, between VAT tax changes, between exchange rate changes, between social issues that drive up costs and different labor laws. There have been continual increases, but remember this is an industry-wide thing that certainly doesn’t affect us more than anyone else. If anything, it affects us less, and the reason it affects us less is that we have more than 100 in-house designers that can redesign product and change product, reconfigure products, change materials... We have capabilities that our competitors don’t have so for us, it’s not a negative as you can see. We’ve pretty much been able to maintain our margins through most of it already, in almost every part of the business that we’re in. We don’t expect things to change. We expect it, of course, to continue to go up, but at a much slower rate. We think we’ve seen peaks in most of the materials. As demand slacks off with some of the materials, even with the increase in price of oil, there’s been a pull back in the price of plastics in the last two months. So we don’t see it as being a serious issue going forward. There are certainly increases out there and retailers are open to accepting the increases. Their main goal is to remain margin-neutral which is the same goal that we have, yet you can’t test price or push prices too high for consumers so we have to reconfigure a lot of things and change things, but somehow we’ve been able to manage it very well at this point.


Gentlemen, there are no further questions at this time.

Jeffrey Siegel

Thank you. Thanks again for joining us this morning. As I noted, we are very focused on innovation and exciting products and that is a key driver of our profitable growth. We’re working more closely than ever with our retail partners to give them what they want and what they need to ignite the interest of consumers. We’ll give you an update on all the activities in our second quarter call. Thank you.


Ladies and gentlemen, that concludes your conference call for today. We thank you for your participation and ask that you please disconnect your lines at this time.

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