Eddie Bauer Holdings Q1 2008 Earnings Call Transcript

Eddie Bauer Holdings, Inc. (EBHI)

Q1 2008 Earnings Call

May 8, 2008 4:30 pm ET

Executives

Neil S. Fiske - President and Chief Executive Officer.

Marvin E. Toland - Chief Executive Officer.

Analysts

Dough Pardon - Brigade Capital

Peter Castilano - Galcier Partners

Andrew Berg - Post Advisory Group

Arthur Elap - DDCP

Ryan Rodnet - Hilink Capital

Michael Osborne - MGO Capital

J. T. King - Cape Investments

Nicholas Capuano - Imperial Capital LLC

Presentation

Operator

Thanks so much for holding everyone, welcome to the Eddie Bauer Holdings Incorporation first quarter conference call. The recording of this call including the question and answer session will be available for replay later today. Information on how to access the replay is available in the first quarter earnings release issued earlier today, a copy of which has been posted on the website at www.eddiebauer.com and now at this time, I will turn things over to our host Mr. Neil Fiske, President and CEO of Eddie Bauer. Please go ahead Mr. Fiske.

Neil Fiske

Good afternoon. Thank you for joining us today to review Eddie Bauer’s first quarter results. Joining me is Marv Toland our Chief Executive Officer. We will begin with some prepared remarks after which we will open the lines for your questions for as long as time permits. Let me also remind you that during this call we may make forward-looking statements relating to the company’s expectations and beliefs concerning our future business and financial performance.

These forward-looking statements are based on various assumptions and projections are subject to risks and uncertainties and actual results may differ substantially. These forward-looking statements speak only as of the date stated and as accept, as required by the law, we do not undertake any obligation to update these forward-looking statements. For further details please refer to the risk factors and cautionary statements in our annual report on Form 10-K for fiscal 2007, and our first quarter 2008 report on Form 10-Q which are on filed with the Securities and Exchange Commission.

Overall we made good progress on our turnaround agenda this quarter despite some significant challenges. Against a backdrop that included high comp store sales comparisons from a year ago. The overall downturn at retail, a higher starting inventory position and the restructuring costs we took in the quarter. We posted slightly positive comp store sales gain and met all of our loan covenants. We made important strides in reducing our cost structure, working down inventory levels, better focusing our stores and catalogs and repositioning our brand. Overall, we are a stronger brand and company this year as we head into the second quarter.

For the quarter comp store sales were up 0.5% on top of a 9.5% gain last year. Retail store comp sales increased 2.9% on a 16.4% increase in 2007. As we have discussed in earlier calls, the retail comp sales is important given that one of our long-term goals is to drive store sales productivity, backup into the range of $450 per square foot, which will leverage fixed occupancy cost and drive higher gross margins. Outlet store comp sales decreased this quarter to 3.1% compared to 0.3% increase in the first quarter of 2007. Direct sales which include sales from catalogues and Web increased 0.3% on top of the 16.3% increase last year.

Total revenues for the quarter were basically flat $213.2 million this year, compared to $214 million last year. Higher inventories for the quarter put substantial pressure on gross margins, which decreased to 27.6% from 29.3% from the first quarter of last year. Most of this decline in gross margin rate was driven by higher mark downs. Gross margin dollars were down for the quarter to $54.8 million from $58.6 million last year. Overall SG&A cost were down 14.9% declining to $95.1 million from a $111.8 million a year ago. On a comparable basis excluding one-time charges this and last SG&A cost were down $2.8 million, offsetting much of the decline in gross margin. Recall that our organizational restructuring was put in place at the end of January, so we will continue to see the reduction in SG&A costs over the course of the year.

Also as part of our restructuring effort we have agreed to terminate our under performing joint venture in Germany in February 2009. We are in discussions with the potential license fee to replace the joint venture which -- with a much more simplified royalty agreement. It is unlikely that we will see any tangible benefit of that arrangement this year except potentially to defray some exit cost. Operating loss for the quarter declined $13.8 million to $25.4 million. This compared to $39.2 million in the prior year first quarter which included approximately $16.4 million in non-recurring costs related to a terminated merger agreement, resignation of the former CEO and an estimated legal settlement.

Marvin will provide more detail on EBITDA and net loss later in the call. Looking forward we remain focused on executing our five key priorities. These are number one clarifying the brand positioning and identity as an active, outdoor, lifestyle brand. Number two upgrading the quality of the merchandise and aligning the assortment strategy to the new brand positions. Number three is ramping our creative marketing and fully exploiting our advantage as a multi-channel retailer, number four cutting cost, rationalizing capital spending and basing cash flow and number and number five building the talent and organization we need to win.

I am pleased with the progress that we have made in each of these areas. We are bringing back the heritage that is made Eddie Bauer a great brand. Our product lines are getting better as we get back to our core. We expect to see substantial improvement by the holiday time period in October with gradual changes along the way. Our marketing is more clear, energetic and aspiration. The positive response we have had received to our recent adventure RIP Stock campaign and our summer catalogue are just two examples.

Our costs are more competitive, and our team is stronger with new leadership in many of the key senior functions. Still it’s important to brand in minds that a turnaround at this time is in multiyear effort, especially given the lead times in merchandising and product development. Ten years of drift and misdirection can’t be corrected overnight. Fortunately, we have a strong proud heritage that’s serves as a road map and a constant source of focus for the work that we have to do. With that let me turn it to Marvin.

Marvin Toland

Thanks Neil. I'll spend the next few minutes in reviewing the finance results in more detail and then we will open the line for questions. As Neil address for the first quarter ended March 29, 2008, total revenues were 2.3 - $213.2 million compared to $214.0 million in the first quarter of last year. Revenue breakdown versus prior year first quarter is as follows. Net merchandise sales were $198.3 million compared to $200.0 million. Shipping revenues was $9.1 million compared to $8.7 million. Licensing royalty revenues of $4.1 million, which included $0.6 million collected from the distributed client as compared to the $3.5 million the same period of 2007.

Royalty revenues from our foreign joint ventures of $1.6 million compared to $1.5 million. Q1 net merchandise sales from retail and outlet stores decreased 1.4% to a $134.5 million as compared to the $136.4 million of the prior year quarter. The lower 2008 first quarter net merchandise sale for retail and outlet stores is primarily due to too fewer stores. Sales from direct channel including sales from catalogues and websites increased 0.3% to $63.7 million. This compares to $63.6 million of sales from the direct channel of the same period last year.

Gross margin for the first quarter in 2008, was $54.8 million, represented a decrease of $3.8 million from $58.6 million for the first quarter of 2007. As Neil mentioned, gross margin percents for the first quarter of 2008, decreased to 27.6% from 29.3% in that first quarter of 2007. The decrease from company's gross margin percentage during the first quarter reflected at 2.2 percentage point decrease in our merchandise margins. The decrease was driven by two factors; higher levels and markdowns liquidate carryover of our 2007 holiday merchandise and high levels to markdown to liquidate our spring 2008 merchandise.

We cut our operating loss by $13.8 million, reduction 35.2%, to $25.4 million from $39.2 million in the first quarter of the prior year. The reduced operating loss was primarily driven by a $16.7 million decrease in SG&A expenses during the first quarter of 2008. Included in first quarter 2008 SG&A expenses are $2.5 million of non-recurring severance costs corporate reduction of workforce. The first quarter of 2007 SG&A expenses included a non-recurring expense totaling $16.4 million associated with the Company's terminated merger agreement, resignation of the Company's former Chief Executive Officer; and an estimated litigation settlement.

Net loss for first quarter of 2008 decreased by $25.5 million or 56.9% to $19.3 million or $0.63 per diluted share compared to a net loss of $44.8 million or $1.47 per diluted share in the last years first quarter. The improvement in the first quarter net loss was driven by a decline in SG&A expenses and higher tax benefit recognized during the first quarter of 2008. The income tax benefit for the first quarter of 2008 was $11.7 million compare to $1.1 million in last years first quarter. The lower tax benefit from the first quarter of 2007, resulted from higher non-deductible expenses, primarily related to the Company's net financing receivables which the Company sold in December 2007.

Including in the Company’s first quarter 2008 results was $3.9 million of non-operational of income for a non-cash fair value adjustment on the Company’s convertible notes embedded derivative liability. This was offset by the impairment charge of $3.9 million to write-off the Company's equity investment in its German joint venture. Loss before income tax benefit, interest expense and depreciation and amortization expense, or EBITDA for the first quarter of 2008 improved by $10.7 million to a loss of $15.1 million compared to a loss of $25.8 million for the first quarter of 2007. Excluding the non-recurring severance expensive $2.5 million in the above mentioned fair value adjustment in joint venture impairment charge, EBITDA for the first quarter of 2008, was a loss of $12.5 million.

EBITDA for the first quarter of 2007 excluding non-recurring items was a loss of $9.4 million. As you know EBITDA is a non-GAAP financial measure that management believes is an important metric because it is a key factor and how we measure ongoing financial performance. We were free to our knowledge -- supplemental financial information in our press release and posted on our website, a reconciliation EBITDA to as most comparable GAAP measurement of loss, before income tax benefit.

Our plan for fiscal 2008 is to open approximately 13 new stores including seven retail and sex outlet stores and to close approximately 28 stores at their lease expirations. Till-date we have opened three retail, and two outlet stores and closed 24 retail and three outlet stores and anticipate closing up to two additional outlet stores during the reminder of the year. Inventory levels decreased from a $155.1 at March 31st, 2007 to a $148.2 million at the end of the first quarter. The $7 million reduction in inventories composed approximately $2 million in lower inventory and a $5 million increase in inventory reserves, taking primarily in the fourth quarter of 2007 the cleaning up, the build up of excess inventory.

We are focused on cleaning up this buildup prior to 2008 year-end. On the balance sheet as of March 29, 2008 we had $9.3 million outstanding under our $150 million revolving line of credit and a $194.5 million outstanding under our $225 million term loan. We met all of our loan covenants in the first quarter. All like many other specially, retailers we do not use letters of credit to finance product sourcing. Given the uncertainty and volatility of the economy, we will continue to monitor term loan covenants.

During our last call, we said that we expect our SG&A cost savings, in the first quarter excluding non-recurring expenses would be in a range of about $1 million to $2 million. Our actually SG&A savings for the first quarter of 2008 were approximately $2.8 million. Increase savings are primarily due to timing at this point we are still on track to reduce SG&A expenses by $25 to $30 million on a 52 week to 52 week comparable basis. That concludes my remarks Neil.

Neil Fiske

Thanks Marv and with that let's open up the lines for your questions.

Question-and-Answer Session

Operator

(Operator Instructions) We will take our first question this afternoon from [Dough Pardon with Brigade Capital].

Dough Pardon - Brigade Capital

Hi, good afternoon guys. You said you were compliance with loan covenants; could you give us what the leverage ratio was at the end of the quarter?

Neil Fiske

Sorry, are you referring to the actual ratio in the loan covenant or…

Dough Pardon - Brigade Capital

Yeah what’s the leverage ratio is for covenants purposes. I know you guys -- it's I guess five and half times of what it has to be below; I was just wondering what the actual number was?

Neil Fiske

We haven’t disclosed the exact compliance for loan covenants in the past. I think because we didn’t mention a specific amount that you'd find the -- very much reasonable.

Dough Pardon - Brigade Capital

Okay and then as it’s fair, I know there is some adjustments with the $12.5 million of EBITDA that you guys report in your press release. Is that fairly close to kind of what the EBITDA is for covenant purposes?

Neil Fiske

The difference between covenant EBITDA and normal EBITDA, will vary slightly by quarter, but on average for both the quarter and the year it’s very close.

Operator

And we’ll go next now to Andrew Berg, with Post Advisory Group.

Andrew Berg - Post Advisory Group

If you guys look at the inventory levels now, obviously down versus prior year. On the average per store basis it looks like you're down. I know you guys are doing a lot of clearing out of stuff as you said for both the holiday and springtime. How do you feel about your inventory levels today in terms of how clean they are versus how much math you sort of move out of the system?

Neil Fiske

Well, I think Andrew, we feel a good, but better now than we did last quarter but as we mentioned on the last call this is a problem that this going to us a couple of quarters to work our way through; we are chipping our way through it and making good progress and I believe that heading into most critical time period of the year which is holiday will be in much better shape?

Andrew Berg - Post Advisory Group

And then do you think about where that inventory resides as you are trying to move it; Is the inventory you are tying to push out looking more on the retail or on the outlet side of the business?

Neil Fiske

Really we're working the inventory issue on both sides. Obviously, the less we can clear out of our retail stores, the less we're going to jam our outlets, which in turn, once we get that inventory down, they can return to be in a good outlet valve for excess inventory. But right now, we've really having to work inventory on both fronts.

Operator

We next go now to [Peter Castilano with Galcier Partners].

Peter Castilano - Galcier Partners

Hey guys; I don’t have well of the balance sheet from the quarter ago but the cash levels; are those materially different from where you ended the fourth quarter?

Neil Fiske

Well. Somewhat the first quarter a year ago…

Peter Castilano - Galcier Partners

No, no it was from the end of the four quarter.

Neil Fiske

Okay. Sorry, at the end of the first level, we were in cash instead of in the revolver and at the end of the first quarter we’re into revolver at $9.3 million, so they are substantially different.

Peter Castilano - Galcier Partners

Yeah, and the size of the revolver is?

Neil Fiske

Revolver is a $150 million line and the amount we’re drawn is $9.3 million.

Operator

We go next now to [Arthur Elap] with DDCP.

Arthur Elap – DDCP

Hey guys. A couple of questions; my first is just a follow-up on the inventory question that Andrew asked earlier. You say that like a dollar level that you sort of are targeting to that. I know it when about a 155 last year’s, it’s down to 148. Is there a sort of a year-end level saying that normalized inventory that your comfortable with at 135 or is that 140s something like that?

Neil Fiske

We haven’t to date published any sort of target in the inventory positions and I am not prepared to speak to that at this point in time. Clearly we are going to continue to work this down, we will be in a substantially better position by year-end than we were this year, but we haven’t give any guidance nowhere we at this time on how much we are planning to have that inventory down.

Arthur Elap – DDCP

Okay and my second question, what was the non-cash or stock based compensation in the quarter? Depending…

Neil Fiske

Hang on, I’m checking on that number for you.

Arthur Elap – DDCP

Okay.

Neil Fiske

$1.1 million

Arthur Elap – DDCP

$1.1 million; and with respect to the number of closed stores which actually there were a lot in the quarter, when those stores are closing, were they -- can I assume their EBITDA negative or neutral or how are they selected in terms of stores that you wanted closed?

Neil Fiske

The majority of the stores that we closed; we closed because they didn’t meet our either strategic or financial criteria; that could be that they were too big and we want to get our fleet more consistent to our 5,500 square foot prototype; could be that they were cash negative; could be that they were in need of a major upgrade or overhaul and we thought it would be better to shutdown rather than seek more capital in temp -- it’s really a variety of reasons, not -- they didn’t all fall into one single sort of cause or bucket and a I think it really represents just the fine tuning of our fleet that we’ll be doing over the course of the next couple of years. I would expect to see that the number of stores that we have could down trend a little bit up or down, but our goal is to keep the size of our fleet largely constant.

Arthur Elap – DDCP

And the final thing is just a question on sort of how cash moves throughout the year. In the end you had $30 million rough -- $27 million of cash on the balance sheet and you have a big cash use I guess historically in the first quarter. Are those sort of expenses for you to accrue it to the fourth quarter than actually get paid in the first?

Marvin Toland

Well, hopefully I can try and answer that a little bit. We do see a seasonal fluctuation in cash, where we go in through revolver in late first to early second and we comeback out again, typically and then go back in again as the seasonal build ups begin and that really has to do with both inventory flow and the level of sales in each season. This year will be slightly different, because as you recall we made a $20 million prepay at the end of December and all of things being equal that will adjust the timing of the revolver use.

Operator

And your next question now from [Ryan Rodnet of Hilink Capital].

Ryan Rodnet - Hilink Capital

Hi guys, just a few questions; on the credit agreement EBITDA, can you talk about that the $2.5 million of severance; kind of where that goes for the P&L, how much of that is cash and my understanding is that that’s not a permitted add back under the credit agreement?

Marvin Toland

It's certainly Brain. Lets see if I can address those in order. Over the first part of the year and that is 100% cash. It shows up in SG&A on our income statement and for our bank EBITDA or our loan covenant EBITDA, if you will there is no add back provision this year for severance.

Ryan Rodnet - Hilink Capital

But you do get an add back for some of the Spiegel inflows, is that correct?

Marvin Toland

The Spiegel inflows those are slightly complex; the only account in the quarter that follows the cash if there’s non-cash income and we have cash income in the following quarter and that did sound a bit twisted, but I can simplify it for you and say that none of the fourth quarter sales proceeds accounted for bank EBITDA and the first quarter escrow payment did.

Ryan Rodnet - Hilink Capital

Got it and then can you discuss the timing of the store closings. When you actually close the stores during the quarter and also discuss the gross margin hit. How much of that was liquidating inventory in those stores and just kind of the timing of kind how that flow through the quarter?

Marvin Toland

So, I think I can do that at the macro level. If we typically -- those that close at the end of the month, January; that’s not always true and we do have a couple of outlet we mentioned that are going to close later and then in terms of gross margin dollars or rates, I think it’s a reasonably well known factor that is very dramatically by stores; at times are closing sale can be quite productive and in other locations it won’t be. In this year really the drivers were the two reasons -- two things we mentioned not to closing the stores.

Ryan Rodnet - Hilink Capital

Got it and just -- there has been a lot of questions about the timing of cash; is it safe to say -- you ended the quarter with $9.5 million under the revolver. Is that -- did that hold throughout the quarter or did you go through that at the end -- did you not start hitting on that until kind of call it the March timeframe and then also did the liquidation of the stores help -- just liquidating that inventory help cash materially, cash flow in this quarter and impact your revolver borrowings?

Neil Fiske

We don’t discuss exact timing of revolver, but I think it’s fair to say given that we were assuming the cash position at year-end that we’re in, the $9.3 million of debt at quarter end, but if you look at that it picked up not the first day of the quarter but later in the quarter. In terms of stores generating cash, I mean they did from a liquidation of inventory perspective, but I wondered again to see if that was a major driver of cash flows.

Operator

And we'll take your next question now from J. T. King at Cape Investments.

J. T. King - Cape Investments

Good afternoon. Can you just give us some more color on the success of the new product launches and what you're seeing because this is kind of the first time I think we're starting to see a rollout with new merchandised kind of overseen by this management team?

Neil Fiske

Yeah. Well, first of all thank you for asking that question. So, I think it’s the key thing as you all know in the repositioning of the brand. There are a couple of key words that we’ve used to define the new brand position and a couple of those are “active outdoor lifestyle brand”. So, the key things that I am looking for is where we have active outdoor products, are they working and are they ahead of our expectations because if that’s the case then I think the brand position that we have established is getting some validation and some traction and I am pleased to be able to say that those active outdoor products that are more authentic and more performance oriented are doing quite well for us, ahead even of our expectations. Now it’s not yet a major part of what we have done; it’s sort of our first step into repositioning our brand and transforming of the product line, but the fact that we've gotten -- the uptake that we've gotten with largely our excising customer base, I think is a very encouraging sign, specifically the products I would talk to would be; in April we had a whole theme that we built around Adventurer Ripstop, which we positioned as the super fabric of the modern outdoor lifestyle and we got a very good response to that fore said, to that theme, to the positioning of Ripstop and we are very please with the results. In our men drawn we had to tune our active performance line that is doing very well and turn quite quickly as shown in catalog and again get in a greater response. A lot of the more active product lines that we have for the summer UPF coded performance, fabrics, more nylon Ripstop are all doing very well. So, I’m very encouraged by the emphasis that we put on active outdoor products and the receptivity that our customers seem to be showing at least the initial products that we brought to market and I take that as a good indication that we’re on the right track; still a long way to go, a lot more to do, but good progress.

J. T. King - Cape Investments

Okay and then can you talk some about -- you have outlined in other presentations or other calls, your strategy with respect to how to deal with the outlet store and just giving that difficult environment there and right now can you just talk some about, where you are with respect to implementing some of those strategies?

Neil Fiske

Sure. So it’s -- by the way let me I forgot to mention one important thing and what’s working is our outerwear business has been very good for us throughout the spring and even until the early summer collection. I should put that up also in the win column. With regard to the outlook business, here’s what I think you will start to see over the course of the summer and early fall is a substantial narrowing of the product line, a fewer styles, better focus, more emphasis on our key items, a simplified shopping experience and really driving great values and the more that we can simplify the product line and focus on those proven winner from retail, the more the outlet business will pickup and again we’ve got a long way to go on that, but we are showing some encouraging signs from the summer assortment where we cut back pretty substantially on the number of styles that are in the store and the feedback from our stores and outlets as well as the customers have been that the overall presentation is less quieter, less confusing and it seems to be working better.

J. T. King - Cape Investments

Okay. Two other quick ones just to make sure I understand on the SG&A and the year-over-year improvement; I mean all else being equal is kind of new products and introductions and better merchandising etc could help offset a tough environment, some inventory challenges. I know you don’t make projections but would the math be that there should be $25 million improvement in kind of operating incomes just based on SG&A savings; it’s a pure ’08 versus ’07 $25 million improvement as opposed to run rate?

Neil Fiske

Let me take the crack out of that and after that Mark can add to it. What I would say is you should expect to see in the SG&A line hard year-over-year on a comparable basis number in that $25 million to $30 million range. They only slide Gabby had on that is was this is a 53-week year and last year was a 52-week year and so we have one extra week of sales, we also have one extra week of cost, but on that comparable 53-week to 52-week basis that line will be down in the $25 million to $30 million range. So, if everything -- obviously if everything else stays the same that would all drop to the bottom line.

J. T. King - Cape Investments

Okay.

Neil Fiske

I don’t know if you wanted to add to that?

Marvin Toland

Yes, everything Neil said was exactly right and remember that, that’s on a reoccurring basis. There’s also elimination of $16.4 million of non-reoccurring cost and a 2.5, 2008 the severance we spoke about earlier non-reoccurring cost.

J. T. King - Cape Investments

Okay and then the just the last question; there are a lot of questions on covenants and then how tight they get and obviously with the stock going to jump down in the quarter on noise in the marketplace I think but can you all as a management team kind of make a high level comment on how much time you are either spending on dealing with banks and covenants or how concerned or how tight or how worried you are? Just give us some color or comfort on that.

Neil Fiske

Yes. Well obviously, we watch it closely and we want to be very proactive about any issues that would come up in regard to our covenants, so to the extent that we thought we had significant issues, I think you would find that we would be out in front of those and my own view of it is, it takes a little bit of time not a lot of time and given that the credit markets are where they are we like everybody else have a heightened sensitivity around any credit related issues, but it’s not a major distraction for us. I will say that this quarter from a covenant standpoint was a very challenging quarter. We were up against our biggest comps of last year; we had a lot of inventory left over from the fourth quarter that we had to get through, we had to take the $2.5 million charge for restructuring and as you know from looking at everybody else’s comps there was a very depressed quarter in retail and frankly I am pleased with the way that we came through the first quarter and the way that we navigated that set of challenges. It remained a very uncertain environment looking forward, but it’s hard to imagining that list of challenges that would be as long or as extensive as the ones that we just went through.

Operator

Next now to [Mike Osborne with MGO Capital]

Michael Osborne – MGO Capital

Hi, guys. So, is it 25 to 30 million of expense –my understanding is that – I know you guys are doing a lot around a sourcing side and made some key hires there. Can you talk about what’s going on in sourcing, is that 25 to 30 million in savings incorporate any gains you might see in the sourcing over the next, 12 months or beyond, just kind of give us some flavor about what’s going on there right now?

Neil Fiske

Sure. So, the 25 to 30 million does not included any benefits from sourcing. That’s strictly production in the overhead structure of the business. There are number of things going on in sourcing, one is we do have as you know Ronn Hall on Board is had map out a sourcing strategy for Eddie Bauer and the capability that we need to really drive improvements in three areas for in sourcing cost, quality and speed and all of those are critical for us to push on. Cost is pretty straight forward, quality we have in our view a fair amount of ground that we need to retake in building the quality and the value perception back into our products particularly in some opening price points and speeding is an enormous opportunity for us. The supply chain right now is very long and it’s hard for us to reorder the thing that are working or get out of the things that aren’t and so one of the thing that could liberate a lot of margin for us is having a fast responsive supply chain that has a very lower markdown structure, that goes with that. So really I think, just the longer-term we need to drive substantial benefits on all of those. The short-term outlook for this year frankly I would not build into remodels any significant improvement and our margin rates as a result of the work that how Ron long is doing. Partly, because we do need to put some of those savings back in the quality. Partly because we need to put some of those savings back in the more competitive opening price points and importantly one of the things that is clearly very different this year then it was been, frankly in decades is the inflationary pressures that we’re seen in the apparel supply chain particularly coming out of China and then as you know a large percentage of most apparel retailers could comes out of China. China is experiencing a large number of inflationary pressures -- the float against the dollar is having a significant impact on the cost of Chinese sourced products, as well as the inflationary product pressures that they are seeing in their own economy which just been growing so strong for so long and the increasing commodity prices like oil. So, the way I have look at it is if we can get out of this year holding our own on margin and not giving anything back against these inflationary pressures we will have made a lot a progress. The other area that we are starting to see some good progress is in our outlet source product, we are doing more counter sourcing and competitive sourcing and we are trying to use some of our output source products, the laboratory if you will for lower cost sourcing solutions and seem some encouraging results there, but the last thing I think at this point we want do is over promise on any sourcing savings that are going to materialized this year. We would affirm our view that very significant upside opportunity for us from sourcing and in margin expansion, but that’s really going to play out over a 2 year to 3 year time period not of one year time period.

Operator

(Operator Instructions) At this time we'll take our next question from Nick Capuano with Imperial Capital.

Nicholas Capuano - Imperial Capital LLC.

Just a couple of quick ones here, the related to some of the initial success of the new active merchandise, your catalog is under going quite a makeover over the last few issues and just wanting to -- just want to see with the reactivity of the much more active, new style catalog. What kind of reception you guide to that?

Neil Fiske

So far as so good and actually it’s been very encouraging. I think probably the shoppers contrast is the summers catalog the last summers catalog and as you know from following at dramatically different, in our view this year is much more active, much more clear and powerful and so far the indications are good that were on the right track. So, I’m encouraged again, we have a lot of work to do and still a long way to go, but we are seeing tangible progress and tangible results where we have made the move.

Nicholas Capuano - Imperial Capital LLC.

And as the year progress how much more of the active merchandise. So the active merchandise that you seen some good initial up tick on. How much more it’s going to be in stores over the next few quarters versus the fall when I know the both of it hits, so is there going to be a progression of more of the newer -- the newer SKU’s?

Neil Fiske

I think you’ll see, first of all spring and summer as you would expect it has a much stronger outdoor orientation in things like UPS fabrics and temperature control kind of fabrics. Fast drive, breath ability those things are critical in the summer months. Going into fall that actually drops down a little bit and the importance to the customers as you sort of go from the needs of the warm weather season to the cold weather and then as we mover into later fall on the holiday active really becomes around layering system based where moisture management, kind of temperature management and a more of an outerwear system and you all see for as this fall, that we've approached outerwear from a complete active system point of view in a fall or a new holiday product introductions and most of the active outdoor orientation will be either in the outerwear category itself or items that relate to outerwear.

Nicholas Capuano - Imperial Capital LLC.

Okay. And finally, there is something of a pick up in April with some better weathers, some little better mall traffic has been reporting in some of the -- there are other Palm guys that obviously reported better comps, than the difficulties in March. I don’t know if you care to comment, if you see this reflected in the environment?

Neil Fiske

So, my view of April would be look at the numbers because it’s pretty uneven and really, if you look at what used to be called the Eddie Bauer Co Tenancy more material female apparel brands. It’s not such a rosy picture. So, that’s one thing, few for me its more validation that were on the right path and repositioning Eddie Bauer out of that head-to-head comparisons with -- and Co Tenancy with that group into a more active outdoor orientation. I would also eventually say whether you are looking at the multiples on active-wear and outdoor companies versus the multiples with apparel companies for the qualitative result that you are hearing from those two sectors. We are better opting position more active than out door that indoor casual women's apparel and -- so, again I think the more that we are moving towards this new brand position and more we have been insolated from some of that downturn that hit our traditional competitors.

Operator

And Mr. Fiske it appears we have no further questions this afternoon. I’d like to turn the conference back to you for any closing or additional remarks sir.

Neil Fiske

No. Thank you. Appreciate everybody dialing in Thank you

Operator

Ladies and gentlemen that will conclude Eddie Bauer first quarter conference call. I would like to thank you all for joining us and wish you all a great rest of good day. Good bye.

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