FGX International Holdings Limited Q1 2008 Earnings Call Transcript

FGX International Holdings Limited (FGXI)

Q1 2008 Earnings Call Transcript

May 1, 2008 8:30 am ET

Executives

Alec Taylor – Chairman, Chief Executive Officer

Anthony Di Paola – Chief Financial Officer

Jack Flynn – President

Analysts

Bill Chappell – SunTrust Robinson Humphrey

Mark Miller – William Blair & Co.

David Wells – Avondale Partners

Eric Tracy – BB&T Capital Markets

Liam Burke – Janney Montgomery Scott

Presentation

Operator

Welcome to the FGX International First Quarter 2008 conference call. With us today from FGX International are: Alec Taylor, CEO; Anthony Di Paola, Executive Vice President and CFO; and Jack Flynn, President.

I would like to remind everyone of the cautionary language about forward-looking statements contained in our press release. The same language applies to the forward-looking statements that management will make during today’s call. We encourage you to read the company’s SEC filings and earnings release, which discuss important factors that could cause actual results to differ from those made in any forward-looking statements.

(Operator Instructions) Now I will hand it over the Mr. Taylor.

Alec Taylor

This is the first quarter 2008 earnings call, and we appreciate your joining us. As a headline, I’d say we had an excellent first quarter, exceeding prior guidance and analyst expectations, and we remain upbeat about the balance of fiscal 2008.

As the operator said, joining me today are Jack Flynn, our President, Anthony Di Paola, our CFO, and also joining us are Laura Kiernan and [Adelia Rodriguez] of ICR, our investor relations firm.

As is our custom, I will begin the call with some overview remarks on the first quarter and balance of the year, and Anthony will go through an in-depth financial review. Thereafter, Jack, Anthony, and I will take appropriate questions.

Looking at the first quarter, net sales were $59.2 million exceeding prior guidance of $56-58 million. Sales were down from the year-over-year period by a little less than $2 million, which is the net affect of the Walgreen’s $3.2 million [Reeder & Son] rollout that occurred in Q1 ’07. It is also worth noting that our jewelry business was down over $2.5 million year-over-year, thus showing the real strength in organic growth of the reading glass and sunglass businesses.

Net income for the quarter was actually up 14% to $2.2 million from $1.9 million in the year-ago quarter, while earnings per share were $0.10 per share versus guidance of $0.07-0.09 per share. Happily, we do not have any one-time items we have to explain to you in this quarter, and hopefully that will be the case for the foreseeable future.

Gross margin for the quarter was 53.8% versus 52.1% in Q1 of ’07, reflecting our gross margin improvement program that started last year. Our margins in readers, sun, and international were largely in line with expectations. Jewelry margins were below prior expectations principally because of higher material costs such as tin and bronze. This was somewhat of a drag on overall gross margins, but we’re still comfortable that we will be in the mid 50’s for the full-year 2008.

Finally, EBITDA for the quarter was $10.5 million versus prior guidance of $8-10 million. Net net we had a very good Q1 as our two key business segments continue to put up strong numbers. Anthony will give you a more in-depth financial review in just a minute.

One item I would like to note, however, is that I promised you we would work on was inventories and receivables. As you can see from the release, both days on hand for inventories and day sales outstanding of receivables came down nicely. I’m proud of our team and the improvements that we made in these two critical working capital components.

Turning now to advertising, as we detailed in the release, and I hope you’ve seen on TV by now, our 2008 Foster Grant TV campaign has kicked off. The first full day after the commercial started running, in-store Wal-Mart sales were up dramatically year-over-year.

This year’s commercial reflects the effort of our new Chief Marketing Officer, Rick Kornhauser. There are five mentions or impressions of Foster Grant in the 15-second ad, versus two last year. Also, we think our media plan is better constructed this year, even though the dollars spent has not gone up.

Rick conducted a clutter breakthrough and persuasion cast, and our ad scored right at the norm for 30-second consumer products ads. This is impressive given that we are running all 15-second commercials. Rick is also working on a pilot television ad for Magnivision to run in the fourth quarter. We believe we can sell reading glasses on TV and push beyond our already successful print campaign. Stay tuned, Rick Kornhauser’s influence is already being felt at FGX.

Turning next to some key account updates, as you can see from the release, and as Jack will elaborate on in the Q&A, we had several nice account wins during the quarter. Notably we got the balance of the Pyrenees airport stores, where we have both the reading glass and sunglass fixture.

These are high-term fixtures that sell 20 plus pieces per week per store, which is four to five times what the average volume of a drugstore might be. You’ll recall we got a test at Pyrenees six to nine months ago in about ten stores, I believe, and now we’ve gotten virtually the entire chain.

We love this channel because of the high turns and the product visibility. We plan to seek other business in airports. In fact, Steve Crellin , our EVP of Sales, told me last night that we’ve got another appointment with another one of the airport accounts. So, we’re excited about the opportunities there.

We also have a very nice pickup at Target, whereas you know we earlier received the entire reading glass fixture and pharmacy. Now we have been awarded a section of fashion readers in the female accessory department. This is exciting as it shows one of the country’s leading retailers believes readers have achieved accessory status. It should have dedicated space in that part of the store.

We tested this program prior to rollout. It did well without cannibalizing the core pharmacy section fixture. We also hope that this is a program that we can take to other retailers.

On the neutral front, let’s call it, is Borders, we announced on the road show and in the Q4 release, that we had been award the reading glass business at approximately 500 Borders’ stores and 400 Walden Book stores. We thought this reading glass program would ship in the first quarter, but it did not, which had a slight negative effect on gross margins. We currently expect it to ship in the second quarter.

Borders has had some financial issues, but this account is largely covered by credit insurance. This program is worth $4-5 million in annual revenues, and it is at good margins. It will be good to finally ship this, and it should favorably impact Q2 results.

On the Wal-Mart front, we were recently informed that they have elected to direct import the opening price point portion of their fixture beginning in mid September. Currently this product is not sold under the Magnivision name. It is on a fixture owned by Wal-Mart, and it is not serviced or replenished by us, also, Wal-Mart is virtually our only major account for whom we don’t have a contract.

While we are not happy about this news, we have been assured by Wal-Mart that they don’t intend to go direct on the entire fixture, but will depend largely on us to provide branded, fashionable product. This represents $3-4 million of lost business over the last half of the third quarter and the fourth quarter, and the EPS impact this year is $0.06-0.07. Full-year impact would be in the $8-10 million top-line range and $0.13-0.15 of EPS.

We don’t like losing any business, obviously, but we do not think we are vulnerable to this type of loss elsewhere where we use our brand, provide service and the fixture, and most importantly we are under long-term contract.

Turning now to international, I’d like to speak briefly about that. Our first quarter performance was on plan, but slightly behind last year. The decline versus last year was principally due to a tough comp in the UK, where last year we did a completely new rollout of our reader line. Absent that event, our business was up mid-single digits, and pretty much performed as we anticipated.

Our Canadian business remains steady, and we continue to add to our strong reader and sun market share there, both through organic growth and new accounts.

In the UK, we are focusing on growing our reader business. Our business model there is about 50/50 reader/sun, but we need it to look more like the U.S. where readers outweigh sun. The UK weather obviously isn’t conducive to sunglass sales, and we want to add key reader accounts. We aren’t in several large UK retailers with our reader product, and we want to change that.

To that end, we are using some of our U.S. resources to assist in the UK, and in the first quarter we made our first joint sales call, where we had both people from the U.S. and the UK calling on accounts that have presence in both the U.S. and the UK, and we got some good results from that. I think you’ll plan to see us be even more collaborative in that regard.

Let’s think for a minute about acquisitions. As Anthony will detail in a minute, our business continues to generate strong, free cash flow. Since our IPO, we have stated that one of the priorities for the use of our free cash, in addition to paying down debt and buying back stock, is a creed of acquisitions. While we aren’t close on anything yet, we are reviewing a handful of opportunities. These are all in the optical area, and each would leverage our core strengths: supply chain, field service, design, and branding.

In my prior position, we successfully built the business by organic growth and a creed of acquisitions. We want to do the same thing here, and we now have the capital structure and management team in place to aggressively looking at opportunities.

Success is impossible to predict in the acquisition game. However, we are focusing some energy in this area, and we are excited about our prospect list and some early discussions we have been having. We’ll make no predictions, but it is certainly in the realm of possibility that we will make an acquisition in the second half of 2008.

Turning to guidance, for the second quarter, we see revenues in the $70-72 million range versus $62.6 million a year ago, an increase ranging from 12-15%. We project earnings per share to be in the $0.16-0.18 range, which is about a 70% increase over the $0.10 per share last year.

Gross margins should be somewhat lower than the first quarter due to mix, as the second quarter is when we do our heaviest sun replenishment. Thus, look for gross margins in Q2 to be in the 52-53% range.

For the year, we’ve left our guidance unchanged at $256-262 million in revenues, $0.72-0.80 of earnings per share, gross margins in the mid 50’s and EBITDA up $54-59 million. This was done very thoughtfully as we believe that the loss of the Wal-Mart’s opening price point business will be made up elsewhere in the balance of our business line.

Looking ahead for a minute, I want to close my remarks by revisiting some of themes I’ve spoke about in my letter to shareholders in the annual report. First, I believe we are more and more acting like market leaders in our sunglasses and reading glasses categories.

We continue to gain share in both of these categories by cross-selling and existing accounts like Target and picking up new accounts in exciting new growth channels like Pyrenees and the airport gift shops. We are using our strong design, sourcing, and field service capabilities to grow our market share.

While we suffered a setback with Wal-Mart, we had far more victories than losses, and we are confident in our growth plan.

Second, I am excited about where we are headed in advertising and marketing, making branding a real meaningful part of the FGX story. Our Foster Grant TV ad this year is a winner, and is already driving real sales increases. We look better at retail this year with our tagging and POS materials having a consistent look. And in our largest and fastest growing category, reading glasses, we are going to bring our full advertising skills to bear and grow our already dominant market share.

Finally, I continue to be gratified by the way our team of veterans, FGX veterans and newcomers, have come together in a collaborative fashion to grow our business. We have successfully made the transition from private to public company, and we are now keenly focused on growing and driving shareholder value.

And with that, I will turn it over to Anthony for a more in-depth financial report. Anthony?

Anthony Di Paola

Since Alec has covered the highlights of our results, I’m going to review a few more P&L items, a new interest rate swap agreement, and go through some additional financial highlights.

As Alec briefly mentioned our gross margin improved significantly during the current quarter compared with the first quarter of 2007. So, the quarter gross margins improved to 53.8% versus 52.1% in the same period a year ago. Improved performance in the reader business is largely related to reduction in cost of goods sold, and we continue to take advantage of our increased buying power.

In the sunglass segment, margin improvement is resulted primarily from product mix and better assortment. We do continue to see margin pressure in our jewelry business due to increased freight costs, lack of a branded product, and lack of size in the market, which doesn’t provide us with a negotiating leverage of our supplies that we enjoy in our reading and sunglass segment.

As Alec mentioned, we also experienced higher than expected material costs during the first quarter. And finally, in the international segment, decreased gross margin resulted largely from a shift in sales from our more profitable reading glass business in the current quarter compared to the previous year.

Now for some comments on operating expenses. Operating expense as a percentage of net sales increased from 44.4% in the first quarter of 2008 compared to 38.9 percent in the same period last year.

As expected, the increase in the current quarter is largely due to the leveraging effects of prior revenue in 2007, increased depreciation charges related primarily to the Walgreen’s fixture placements, and incremental costs for stock comp expense. Also contributing to the increase are the costs associated with being a public company, principally our stock option implementation cost.

From a tax perspective, our reported tax rate for the quarter was 37.6%. This rate was in line with our previous guidance of 37-38%, and based on our current planning, effective rates for the full-year is expected to remain at current levels.

Before reviewing the balance sheet, I’d like to briefly discuss our new pension program. We have successfully fixed the interest rate for approximately half of our term loans at 3.22% plus an incremental 1.75 or a total bond cost of about 5% for the five-year duration of our term loan. We believe it made financial sense to lock in an interest rate on a substantial portion of our debt given the low interest rates currently available to our company.

Now for some comments on the balance sheet and cash flow. Accounts receivables of $40.2 million are down $12.8 million at the end of the first quarter of 2008 compared to the end of 2007. The decrease primarily results from improved collections from several of our significant customers. Accordingly, our DSO’s at the end of the first quarter improved to 70 [TD’s] compared to 84 [TD’s] in the same period in 2007.

Inventory is at $33.6 million, increase slightly at the end of the first quarter compared to the end of 2007, while inventory days on hand improved to 111 days compared to 120 days for the same period a year ago. This improvement is primarily related to better management of our inventory levels as we continue to improve and work on our working capital measures.

From a free cash flow perspective that we define as EBITDA plus capital expenditures, it was approximately $6.5 million for the first quarter of 2008 compared to $6.9 million for 2007. A slight decrease in cash flow for the quarter compared to the previous year is largely attributable to the increased offering and expenses, again, principally from costs associated with being a public company.

The first quarter of 2008 capital spending was about $4 million, which was in line with our expectations. We continue to invest primarily in store fixtures to support our revenue growth and expect full-year 2008 capital spending to be in the $16-18 million range. Capital spending for the second quarter is expected to be $16 million.

We continue to expect free cash flow to be in the range of $37-40 million for 2008 as we continue to improve profitability and manage our resources more effectively. Again, we anticipate that this strong free cash flow will primarily be used to reduce debt, fund a creed of acquisitions, and fund our stock profit program.

Finally, in summary, we enjoyed a good start to 2008 with solid results during the first quarter. We experience continued gross margin improvement, good cash flows, and improvement in our working capital measures, and we were able to fix the floating interest rate on a significant portion of our debt. We are looking forward to building on this momentum that we have created during the first quarter of the year.

And with that, I will turn it back to Alec.

Alec Taylor

Thanks, Anthony, and with that, operator, we’ll be happy to open up to questions.

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from Bill Chappell – SunTrust Robinson Humphrey.

Bill Chappell – SunTrust Robinson Humphrey

I guess the first question on, actually, the second quarter guidance, are you assuming that Borders all kicks in the, I mean, the $4-5 million in the second quarter, because if so, you know, excluding that deal, you’re only implying kind of a 3-7% year-over-year growth on the top line. So I’m just trying to understand how we should look at that.

Alec Taylor

Yeah, Borders… The $4-5 million I think we used, that’s a full-year number including, you know, at least probably two turns of replenishment. I think the rollout is in the $1.5-2 million range.

Bill Chappell – SunTrust Robinson Humphrey

So it’s still… You’re only looking for kind of high single-digit organic growth?

Alec Taylor

Yes, I would say that’s right. I mean it’s consistent with… Yes, we’ve said we would kind of gross 7-9%, you know, was what the plan was for the year, so yes I would say Q2 would be in line with that earlier statement.

Bill Chappell – SunTrust Robinson Humphrey

And we’ll have some sense that the Borders will happen early in the quarter, late in the quarter, or just tough to tell. I would say, Jack, hopefully, probably, hopefully, by the end of this month, early June?

Jack Flynn

Yes, it should go out in two pieces. The Borders piece first, and then the other portion probably later in the quarter. So I would say in May and then probably in June.

Bill Chappell – SunTrust Robinson Humphrey

And then just digging into Wal-Mart, Jack, a few questions I’m going to fire off. Maybe you can help me.

One, you know, why would Wal-Mart care about a $10 million piece of business, you know, it seems small to go direct versus just using you?

Two, can other customers do this? I mean is this something that we can see all the time?

Three, what are the chances of Wal-Mart saying, let’s go direct for the entire business.

Jack Flynn

Look, we weren’t happy about the decision, and I… Quite frankly, we were caught a little bit by surprise. You know, kind of having the chance to look back on the business and discuss it with them.

You know, a couple of history pieces, you know, they started… They did the same situation in sunglasses probably about ten years ago. We put them into the opening price point sunglass business, they ran it for a while, got a drift in terms of, you know, what real cost styles they could run, and started importing the opening price point sunglasses.

And we really haven’t varied from that. I think it’s always been about 15-20% of their buy, if you will, and they’ve stayed that way leaving all the other products, the fashion pieces to the vendor base of which we have the biggest piece.

On the reading thing, I think they looked at the business. Last year that business grew 3%. This year the business trend was, on the opening price point, was actually a negative comp it’s off about 0.8% for last year. Meaning that you have, you know, four or five core styles.

They’ve been around forever, all the growth is coming in the premium and the mid price point categories, and our fashion businesses are up in the 20 plus percentile numbers where that business was flat. And, I think for them, you know, they have a lot of pressure to do some DI, they’ve got a big overhead to feed in the Orient, and I think they’ve said, look, we can do this thing. Oh hey, we can give it a try, and if it works, great, if it doesn’t, you guys can go back and do it again later on.

As much as it hurt us, they just thought it was just a real small issue. They get the DI people as the buy the shirt off their backs, and they kind of roll forward with something that is really kind of dumb dumb business, four or five skews, and I honestly feel going forward, and I… You’ve seen the same thing from the sunglass point of view, the fashion, the technology, the style ups, all those other issues that are growing rapidly, they will continue to have us handle the majority, plus some other vendors.

I don’t see them adding anything on. Why would they take that risk? They don’t need that. That’s what we’re in business for, and I think it will continue that way.

When I look at the rest of the retail landscape, again, I don’t see it happening. We’ve seen some reverse trends. Mia, which was importing reading glasses, they’ve got out of the business. We’ve just taken over that space.

The last one that was still out there, Shopko, had a DI piece of the program. We’ve gone in, and we’re currently testing our program, again in addition to our core program to take them out of the DI business.

I honestly think this is a one off Wal-Mart issue. Again, they have that kind of infrastructure oversees to handle, and, you know, every place else, we’re running it by brands. This was a non-branded piece in Wal-Mart. Again, I think it’s one off, and I don’t see it happening elsewhere in other retailers.

Bill Chappell – SunTrust Robinson Humphrey

And Alec, just to finalize this. Did you look to this year or next year? You said you can recoup the lost sales this year. Is that just from momentum of existing customers you’ve already won, or do you need to win some more customers to offset it this year? Do you think either from the momentum or new customers, you can fully recoup it on an annualized basis next year.

Alec Taylor

Yes, I mean, we have a pretty high degree of confidence given the momentum build is a business in both readers and sun elsewhere. If you look at our… We look at POS daily, and if you look, you know, and you see CVS up high teens in the reading glass business, Family Dollar up even more than that, and Reeder and Son.

We have a lot of momentum in the business. Say, last night, if we hadn’t been talking about this Wal-Mart business, we probably would be having the discussion, and you guys would be pushing us to take our numbers up, because the business has a lot of momentum about it right now.

We, you know, we’ve had some significant customer wins already. We do not have to have, you know, other wins as long as the things that we’ve detailed or the organic growth continues.

That said, and as Jack can elaborate on, we have a number of exciting opportunities of people we’re in front of right now. Some of them are existing accounts with cross-selling opportunities where, you know, our cross selling has been a big part of the success story. So, we feel, we can do it on the business we’ve got, but we are really excited about a couple of the opportunities that we have that could land this… That we could land, still this year and that could impact, in particular, Q4.

One last, and then we’ll let Jack elaborate on that a little bit, Bill, if I could. But, one last thing, we’ve also, I think, managed our business very well on the, you know, interest rate, Anthony before, he talked about in prior calls $7-8 million of annual interest costs. I think you could model the $7 million now.

The swap was very successful. Interest rates keep coming down. We manage working capital well. We’re borrowing less. We had two pieces of litigation at the start of the year that we had thought we were going to spend a fair amount of money on, and budgeted for that. Jeff Giguere, our General Counsel, did a great job along with Jack, was real involved in one of those. We settled both of those, and we were able to, you know, say, we’re probably not going to have to spend $.5 million or better defending litigation.

Lastly, we had a big… Bob Grow did a great job of negotiating a volume rebate with one of our suppliers, and said if we had a certain volume number, we’d get a $400,000-500,000 rebate. We’re going to almost certainly hit that.

So I think a combination of those things would give us confidence about… And again, why I think we very thoughtfully said we think our guidance for this year feels good based on the business we have, and with that I’ll let Jack just touch briefly on, you know, without naming names, we’ll talk about some good opportunities that we’re working on.

Jack Flynn

You know, Bill, here’s my take on that piece. I think the majority of that business, we should be able to cover from a pure comp point of view. That’s what we’re going to focus on first and foremost.

You look at our business year-to-date in the reading glass area, our year-to-date sales for last year are up 13-14%. When you take a look at retail right now, there aren’t too many categories putting up those kind of numbers, very, very healthy business.

And what’s driving that business, again, let’s go back to the Wal-Mart thing. It’s not OPT, it’s the fashion and it’s the new items we were bringing out, the optical pieces that are coming into play for the reading glass business.

I just came back from NACDS. When you have a hot category like that, customers are asking us. It’s not a promotional business, they are asking us outpost. Where can we go elsewhere in the store to drive this business? What customer are we not serving? What customer are we missing? Can we do something in cosmetics? Can we do something in book and magazine? Can we expand out current modular in a top, you know, 50% of the stores.

All those things are happening in a very healthy business right now, so I feel the comp business is really, really strong and going to stay strong. When we’re coming up 13-14% increases on top of 13-14% increases last year, very healthy business. The new business pieces we’re going to continue to attack, we’ll get our wins. We always do, but quite frankly, we’re looking to cover our flank on this piece here, mostly through comp expansion and continued comp growth.

Operator

Your next question comes from Mark Miller – William Blair & Co.

Mark Miller – William Blair & Co.

How much of your reader and your sun business is opening price point on branded? And, if you want to make clear whether you’re talking pre or post this Wal-Mart change. What is the size of that relative to some time in the past, a couple of years ago, perhaps?

Jack Flynn

Our opening price point business private label, probably depending on the account is probably a 10-15% number. That’s where I think we’re at in most cases.

Mark Miller – William Blair & Co.

And that is the size of your total business, including Wal-Mart, so it comes down after this change?

Jack Flynn

Well obviously, that piece will take our opening price point business down, and it really is… I would say elsewhere it’s not really a gross business either. Actually, if you look at the CVS business, it’s been a declining business over time. Again, there’s a core opening price point customer. We want to service them. We have offerings for them. But, again, the true growth of the business has been elsewhere on the fashion and the optical and the convenience pieces.

Mark Miller – William Blair & Co.

Can you talk about what you may want to do as an organization? Obviously, the people at Wal-Mart are not fools, so you’re other customers are probably asking themselves, hey what is the trade off of an initiative like that. Can you maybe outline for us what your experience has been as you’ve taken Meyer or in the test with Shopko, how you’ll go into those retailers and maybe talk about what the gross profit experience has been, you doing it versus direct import.

Jack Flynn

Quite frankly, I’m not going address it with any of the retailers, because I don’t think they’re going to address it with us. I think… Look you go back, and as I talked about before, ten years ago with the sunglass piece, the majority of our customers to this day are not direct importing sunglasses either.

Are there some of them capable? Probably. But it’s never been an issue. Wal-Mart’s been DIing sunglasses for ten plus years, and by and large most of our sunglass customers have never followed suit. So I don’t think it’s going to come up with the other retailers.

Alec Taylor

And Mark, to elaborate just real quickly, I think very few of them, if any, maybe one or two exceptions, would have just the muscle and size that Wal-Mart has to go get the pricing… Wal-Mart will not get the pricing we get on this. We buy a hell of a lot more units than they will buy. But I really think, you know, with the possible exception of one or two or them, nobody can really do a DI program.

And, Jack, wouldn’t it be true that I know that you guys have experienced this and I have not, but those guys who did DI programs, direct import programs, the Meyers and Shopko’s who are now going back, or testing going back, became very frustrated with, because of the things that they… the service, the big inventory. Recall you have a style and then you have it in six powers. It is not an easy category to manage by any stretch because, again, the service and the style outs, and all that.

Jack Flynn

In the past when Wal-Mart did the sunglasses, it took them about two, three years to figure the whole thing out, and I think they’ll go through the same similar transition on the reading glass piece. Again, this is a very tough business, to Alec’s point in terms of the number of powers, the inventory, just the pure replenishment at store level.

It’ll take them some time, but again, I don’t see it happening elsewhere. I’d be surprised if it came up from any of our customers. If it does, we can walk them through the financials as we see them. We can walk them through the opportunities as we see them, and I think it’s a non-issue with the rest of our retail base.

Mark Miller – William Blair & Co.

That’s helpful. You know, the rest of the branded business seems to be doing great. Do you think that you want to allocate more advertising to the Magnivision brand over time, or do you feel like you’ve got sufficient drive and momentum behind that business as it is?

Alec Taylor

Yes, I think we want to put more behind that. It’s interesting, and I think this is probably the one big revelation Rick Kornhauser had. He came and said, why are you putting most of your advertising money behind Foster Grant. I said, well, you know, it’s a well-known brand name, and readers are a little nichier, and he said, you know, we thought the same thing about topical pain rub.

He said, you know, I think you can advertise this brand, and I think you can make Magnivision… You know, Foster Grant has some name recognition, and we’re not going to ease off there at all, because we only have a 20 share or so in sun. But I think in readers we see an opportunity to really create…

And look, the ultimate defense to direct import, private label competition or anything else is a strong brand name. If anything, you know again, this was non-branded, but strength in that brand name, spend behind the brand.

That’s why we’re going to test a Magnivision television ad. We’re working on that. Rick’s hired a new agency. They’re actually, I think in here tomorrow to show us their ad concepts. We’re going to run a pilot add. We’ve allocated the money for that as a part of the advertising spend in Q4.

We’re still kind of working on that, but we’re real excited. We’ll probably want a four-week pilot campaign in a discreet market and see what sort of lift we get. What we find, and what, you know, Jack can tell you better than I, but we have a significant part of the marketplace that doesn’t understand press byopia. They don’t understand self-medicating. You know, we’ve all self-medicated. It’s my little thing, you have a headache, you don’t go see the neurologist, you go to your medicine cabinet and get an aspirin.

If you have trouble reading the phone book when you’re in your early 40’s, you don’t have to go see the eye doctor. Most likely, what you have is presbyopia, and you can go to one of our retail outlets and find a pair of reading glasses. So, long answer to say, yes, we think that developing the reading glass business with more advertising makes a lot of sense.

Mark Miller – William Blair & Co.

Okay, I think that’s the right idea.

Operator

Your next question comes from David Wells – Avondale Partners.

David Wells – Avondale Partners

First off, if you could touch on kind of what you’re seeing in your sun business, kind of thus far into Q2. I believe you’d said that kind of late March it had been a little bit slow due to weather. Have you seen an acceleration there?

Jack Flynn

Yes. Look, January was good, February was good, March was a real tough month, not just for our category. I think if anything, it was a seasonal category. We track sandals, we track beachwear, we track sun care, and actually, I thought we did a little bit better than a lot of those other seasonal categories.

April really bounced back nicely. We were really pleased with our April business. It was rock solid. So, again, we’re coming off some pretty big comps from last year, as you all remember in terms of our over-the-counter performance, but we feel pretty good about what we’re seeing.

Again, some solid bounce back once the weather improved, once the advertising broke. Price point wise, selling, you know, across the board, similar to what we sold last year, this is not a drive-down in terms of price points. So fair, we feel pretty good about what we’ve seen all of April, and actually the first few days of May.

Alec Taylor

And, I would tell you last year, this business really accelerated in May and June last year. We came off an April last year that was pretty tough, but I remember, of course we weren’t public at the time, but I remember last year going into May and going into Jack’s office and said, this sunglass business in April wasn’t all that hot. It’s better this year, and we are now going into the time of year where it generally really seems to accelerate.

Jack Flynn

We’re kind of particularly pleased, a lot of our new offerings, which went through our testing procedure last year, are really performing at a high level. These are all I would say, 90% of the test of skews are performing in the top 15/20% of our skew base in ’08. So we’re really pleased with the new styles that we brought out. Quite frankly, versus the competition, we’ve been getting more than our share of the modular of business where we share business at retail.

David Wells – Avondale Partners

In terms of, kind of, reorder rates for sun, when should we start looking for indications regarding those?

Alec Taylor

You know, again, we look at… We had our plan even though our business was off to our plan for the first quarter, I’m talking about over-the-counter plan, our revenues were actually up a bit from where we thought before. I would tell you we’re pretty much well into the replenishment piece for Q2, and we’ve seen no deterioration.

The retailers are supporting the category, open-to-buy in terms of their ability to give us money to fund the business has not been affected. We feel, again, pretty confident. We’ll watch POS. You know, our replenishment is just a factor of POS, but so far for this month, again, we feel pretty solid. We don’t see it pulling back for the quarter yet.

David Wells – Avondale Partners

In looking at your jewelry business, I guess another kind of meaningful decline in the quarter, are we kind of reaching the point there where we’ll start anniversarying those, or should we look for continued declines in that business kind of through the balance of the year.

Alec Taylor

I think we’re going to have some times possibly through, you know, Q2 and Q3. Again, we’re sticking with our strategy trying to move our business into some different classes of trades and different retailers so we enjoy some more sustainability, if you will. Wal-Mart business continues to be really tough for us, and I think for anybody who’s participating in that fashion jewelry category with them.

The promotion of the lost core business is really limited to where it was last year, all part of them cleaning up the floor and offering a better presentation to their consumer. A lot of buyer changes there, and the whole category now is going to be moving to New York. It’s been very disruptive.

So, quite frankly, we think Q2 and Q3 in Wal-Mart, which is our biggest customer, we’re going to remain to be tough. Hopefully offset a little bit. We’re going to get an early rollout with the Rite Aid Brooks [inaudible] that’s going to go out earlier than we thought. We’re going to have all those stores out by the end of July.

Our Family Dollar business is good, our Fred’s business is good. We are continuing to make some headway in mid-tier at department stores, so we’re going to be very cautious in Q2 and Q3. I don’t think we’ve bottomed out on that piece yet.

David Wells – Avondale Partners

Then just a last question, kind of looking at G&A expenses for the rest of the year, should we kind of expect a similar run rate as a percent of sales going forward, or are there some, kind of, one-time costs that got lumped into the first quarter.

Anthony Di Paola

Sure, there are some, I think for the balance of the year, it should be a little bit lower. We had [inaudible] up this quarter. Obviously [inaudible] indication of that [inaudible] are a little more significant.

Again, as a percentage of sales, it should come down. Just keep in mind next quarter obviously, Q2 is our big advertising spend, if you will. Again, the percentage as paid by the revenue will be very similar or a little bit lower than what they were in Q1, but the absolute dollars will be a little bit higher.

Operator

Your next question comes from Eric Tracy – BB&T Capital Markets.

Eric Tracy – BB&T Capital Markets

If I could maybe just follow on that last question in terms of G&A, and more specifically, the Q2. Just trying to sort of reconcile given that it sounds like the ad spend will pick up their gross margins kind of at 52-53% range, and a high single-digit top line. Is that all relatively fair, and if so, I’m just trying to reconcile. Is there sort of a lever to be pulled at the interest expense, to give them a lower…?

Anthony Di Paola

Yes. I think Alec mentioned that interest, you know, we’ve got it at $7-8 million. I think we’re towards the lower of that range. We’ll have some savings from the legal expenses that Alec mentioned in terms of what was budgeted or planned on spending some dollars for that, again, we settled those cases, so that will come back to us.

And, we’ll spend some more on the advertising, so net net results should be in the low point from our [inaudible] perspective.

Eric Tracy – BB&T Capital Markets

And then maybe just following on that in terms of potential levers that can be pulled. Obviously on the reader business, can wield some pretty significant power. Maybe just talk through again from a sourcing perspective as we move forward, sort of the puts and takes with obviously higher input costs here. You know, what the opportunities are there?

Anthony Di Paola

We’re obviously working our vendors as far as we can. You know, the one opportunity is the outpost [inaudible]. One of our key suppliers that we a no problem with discount that we’re anticipating, but you know, we hadn’t planned on, but we think we can reach with him $400,000 or $500,000 given that we didn’t plan for that.

Alec Taylor

Yes, we also saw, I think you’ll see… In the second half you’ll see some nice… A couple of our popular items, our hyperflex items and our titanium item, again, our sourcing people led Bob Garr, did a great job of finding away to let our competition in our secrets, but we found a way to reduce costs meaningfully there, you know, double digit cost of goods, decreases in a couple of real popular items, and that will start showing up, I think, not in Q2, but 2H, it should help there. We worked this pretty hard, and we’re good at it.

Eric Tracy – BB&T Capital Markets

And then just on the Pyrenees business, obviously a very attractive business for you guys given the turns, you mentioned some other opportunities sort of in that airport channel. Can you give us, sort of, the relative size of some of those other opportunities compared with the Pyrenees?

Jack Flynn

I think there’s one opportunity out there that is actually a little bit larger size than what the Pyrenees is. There’s been some consolidation in that area, but we’re really focusing on one piece of business that we think could match or exceed the Pyrenees piece.

Eric Tracy – BB&T Capital Markets

And then, Alec, this last is for you. You know, free cash flow in that $70-72 million range, priority has been to continue to pay down debt, kind of talk through comfort level around the cap structure here. It sounds like the acquisition gets sort of bumped up on the priority list of uses of cash. Is that fair?

Alec Taylor

I’ll let Anthony take the first part of that on the free cash flow, and I’ll speak quickly to acquisitions.

Anthony Di Paola

I mean, the free cash flow for the year is $37-40 million. I just wanted to clarify that. So, we’re comfortable. Right now we’re a little, we’re levered a little over two times, if you will, from our last twelve months of EBITDA.

It’s a comfortable place for us. We have a facility in place that allows us to borrow, you know, almost another $100 million if we so choose. So I think we have the structure, the infrastructure in place for funding acquisitions from that perspective, but it’ll, a lot of it’ll depend on the opportunities.

Alec Taylor

I think that’s right. Just several things quickly, this company could operate at leverage at three to four times EBITDA, you know, without changing the way we do business, cutting advertising or anything material like that. We were leveraged over four times until the IPO.

You know, I think my comfort level and Anthony’s is certainly filled very easily at a three times leverage. So I think we could do that. Anything we buy, we obviously, you know, we’re going to do a creed of deals, but yes, I would say that you are correct. It bumped up the priority is probably a good way to put it.

We, you know, it’s the right time. I mean, look, we went through getting public, getting the capital structure right, getting, you know, all these other things in place. We are ready. This company is ready to make an acquisition, and we’ve got, you know, again I don’t want to overstate the case, but we’ve got three or four, you know, active things that we’re involved with right now.

All of them are early stages, you never know, but they’re all things that would be in our core strength area that, I think people would respond favorably to. So, we’re spending some time there for sure.

Operator

Your final question comes from Liam Burke – Janney Montgomery Scott.

Liam Burke – Janney Montgomery Scott

Back in your past life, you had a tremendous amount of success getting a nice return for your advertising, your TV advertising book on foot powder and shampoo and whatnot. How does that translate into this upcoming 12-week ad campaign for the Foster Grants.

Alec Taylor

Yes, I think, very similar. Old dogs don’t learn new tricks very successfully. You know, I think, we’re, frankly, trying to emulate things we learn before. The best way to do that is bring the guy who was one of the key playmakers to us, and that has to do with Rick Kornhauser’s arrival. I think it’s very similar…

Look, the category’s a little different. You’re selling with sunglasses a more fashion accessory item, so the ad is a little subtler, but still, 15-second ads, the way we bought the media, very similar the way we did it at [Chattam]. You know, very opportunistic. This is a regional buy this year.

We went to the 45 tops markets in the U.S. It said, this is where we ought to buy. This is the largest media markets, markets where we have a lot of penetration with doors, customers, where the sun shines. Gross ratings points are twice what they were, nearly twice what they were a year ago under the current campaign.

So I think it’s going to be, you know, just an ad, totally. We hear a lot of people say gees I saw your ad. I’ve seen your ad two or three times. So I think it’s going to be very similar the way we run this, and then again, harking back to a prior questions, if we have some success in this Magnivision thing, you’ll probably see some back-to-back Foster Grant and Magnivision 15s would be my guess.

Liam Burke – Janney Montgomery Scott

Anthony, you mentioned $6.5 million in free cash. Now that was EBITDA less CapEx. Do you have a net working capital number for the quarter?

Anthony Di Paola

We haven’t put that out yet. I’ll get that for you.

Alec Taylor

Again, thanks everyone for joining us. I appreciate it. We had a little longer call today, but I think there was a lot to talk about. As I said, we appreciate your patience. We’ll look forward to reporting our second quarter and first six month’s results, which should come at the end of July to early August. Thank you.

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