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Elizabeth Arden, Inc. (NASDAQ:RDEN)

F3Q08 Earnings Call

May 1, 2008 10:00 am ET

Executives

Scott Beattie – Chairman, President and Chief Executive Officer

Joel Ronkin – Executive Vice President, North American Fragrances

Stephen Smith – Executive Vice President and Chief Financial Officer

Marcey Becker – Senior Vice President, Finance, Treasurer and Corporate Development

Allison Malkin – Senior Managing Director, ICR Inc.

Analysts

Alice Longley - Buckingham Research

Joe Altobello - Oppenheimer & Company

Rommel Dionisio - Wedbush Morgan

Jason Gere - Wachovia Capital Markets

Arnold Ursaner - CJS Securities

William Chappell - SunTrust Robinson Humphrey

Operator

Welcome to the Elizabeth Arden Third Quarter Fiscal 2008 earnings conference call. (Operator Instructions) It is now my pleasure to introduce your host, Ms. Allison Malkin of ICR.

Allison Malkin

Good morning. Thank you for joining us. Before we begin, if you have not received a copy of Elizabeth Arden’s press release, please call 203-682-8200 and we’ll send one out immediately.

Also, please note that this call is being broadcast live over the Internet, and you can access the call at www.elizabetharden.com.

Before we begin, I’d like to remind you that some of the comments made on this call, as either prepared remarks or in response to your questions, may contain forward-looking statements that are made pursuant to the Safe Harbor provisions of the Securities Litigation Reform Act of 1995.

Such information is subject to risk and uncertainties that could cause actual results to differ materially from the statements as described in the press release and in Elizabeth Arden’s most recent annual report on Form 10-K filed with the SEC. We direct all listeners to that report.

Also, some of the information that may be contained in our earnings releases or comments made on this and other calls may constitute non-GAAP financial information under the SEC’s Regulation G.

Reconciliations of such information to the most comparable financial measure prepared in accordance with Generally Accepted Accounting Principles may be found on our website at www.elizabetharden.com.

The information contained in this call is accurate only as of the date discussed, and investors should not assume that the statements made in this call remain operative at a later time. Finally, Elizabeth Arden undertakes no obligation to update any information discussed on this call.

I would now like to turn the call over to Scott Beattie, Chairman and CEO of Elizabeth Arden.

Scott Beattie

Thank you, operator. First of all, welcome everyone for joining us on the Q3 conference call. Joining me today is Joel Ronkin, our Executive Vice President of the North American Fragrance unit; Steve Smith, our Executive Vice President and Chief Financial Officer; and Marcey Becker, our Senior Vice President of Finance.

First, I’d like to just outline the agenda of the call today. As usual, I will provide a summary of our Q3 performance, and specifically, our performance in our international business and the global Elizabeth Arden brand performance and a look forward into Q4.

Joel will then provide a review of our North American Fragrance unit and Q3 performance. As you recall, this business unit that reports to Joel is approximately 60% of our total business. The remaining 40% of our business is the international piece. Joel will also provide a summary of the fragrance brand launches and the performance of our fragrance brand portfolio.

And finally, Steve will provide a summary of our Q3 and year-to-date financial performance, working capital metrics and a more detailed review of our business efficiency initiatives.

In terms of our Q3 performance, obviously, it was a tough quarter for us. It’s traditionally a weak quarter, particularly in our fragrance business. Overall performance and execution was difficult during this third quarter.

I’d just like to talk a little bit about and recall some of our Q2 conference call where I identified and described a tale of two different worlds. Q2, our U.S. business was down 2%, and our international business was up almost 20%.

At that time, we also identified a continued weakness in the U.S. consumer in the economic environment. As a result, we lowered our Q3 guidance to reflect the potential for lower than planned replenishment orders, particularly in our North American Fragrance unit.

Obviously, to the extent that there is additional inventory at retail, for the vast majority of our retailers, that gets normalized during Q3. And we recognized that there would be some weakness in replenishment during Q3 in our North American Fragrance unit.

On top of that, as I mentioned, it’s generally a weaker quarter, and as a result, we have a deleveraging of our operating overhead. What occurred during Q3 was that the North American business softened somewhat, as we predicted, and was basically in line with what we had anticipated.

The retails were actually a little bit better than the ship-ins and the replenishments. That shows that although it is a weak consumer environment and a weak retail environment, the retails were slightly better than our ship-in performance, and Joel will go into more detail.

During Q3, the North American business was down approximately 4%; our mass business was down 2.2% and our U.S. department stores business was down 16%.

In international, our overall business was down 3.8%, but year-to-date, we are still up 12%. And that’s really being driven by continued strong performance in APO, which consists of all of our Asia Pacific region, as well as our travel retail and distributor market, which now represents approximately 50% of our total business. That was up 8% and 16% year-to-date.

The remainder of Europe, the primary weakness was really in the U.K., which is one of our strongest fragrance markets. As you recall, we had a strong performance in Europe and in the U.K. for the first half of the year, and some of that residual fragrance inventory that was in particularly some of the key fragrance retailers in the U.K., provided an overhang into the Q3, and as a result some of our replenishment during Q3 was reduced.

We were seeing, again, that normalize. The retails in the U.K. weren’t as weak as our wholesale shipments and replenishment into those customers. And so we expect to see that normalize as we move into the fourth quarter.

Just in terms of overall Europe, the Q3 was down 12.5%, but even year-to-date it’s still up 8%. So some of the gains we had during the second quarter were a bit offset by the weakness in the third quarter.

In terms of brand performance, I’ll just comment on the Elizabeth Arden brand globally. The brand was down 6% for the third quarter. On a 12-month rolling basis, it’s still up 5%.

The negative performance during the Q3 was really driven by fragrances, again. Typically, we had a very strong fragrance period during the second quarter, and on a global basis, and, as a result, we had weaker replenishment on the fragrance portfolio during Q3.

In terms of skin care, in Q3, we’re up 4%, and Elizabeth Arden year-to-date we are up 11%. Prevage in Q3 was up 18%, and year-to-date it’s up 21%. Color was down 6% for the Q3, but year-to-date, again, it’s up 4%.

So when you look at the 12-months rolling average year-to-date and the performance across the Elizabeth Arden brand, we’re very pleased with that. It’s, on a global basis, growing at 5%, and it provides business, as it’s continuing to perform extremely well for us both in North America and in international.

Our fragrance brand portfolio was generally down for the third quarter, but on a year-to-date basis, it’s still positive and growing. As I mentioned earlier, retail trends generally are better than the shipment during Q3.

Finally, just a few highlights of specific operating units. Our Greater China business, which is China, Hong Kong and Taiwan, again had a very strong quarter. It was up 36% this quarter year-to-date, up 33%. That’s essentially all Elizabeth Arden branded business. There’s very little fragrance business there.

Our emerging market business, which is still a relatively small component of our business but growing rapidly – which consists of markets like the Middle East, Latin America, South America, India – Q3 was up 15% year-to-date, up 24%. Obviously, those are the markets where we’re continuing to invest and grow those businesses, because we see tremendous opportunity from a small base of volume.

Steve will discuss in more detail the operating overhead, our chief initiatives, but I would just like to comment on a couple points. Steve and our operating managers have done a great job during this difficult economic time, controlling our overhead and managing our cost structure.

Despite the deleveraging that we had in Q3 with reduced sales, we were still able to continue to increase the investment in our brand advertising and support.

Really, the Global Efficiency Engineering initiative, which I talked about previously in other conference calls, I’d just like to provide a little bit additional background on this. We started this project in 2007. It began with a complete review of everything from account management, category management, extended supply chain, supply and ops planning, right through the logistics and information technology.

What we did is we brought in an outside consultant that benchmarked our business against other competitors and other personal care and consumer product packaging companies to identify efficiency opportunities for us.

During that process, we identified significant opportunities for improvement in productivity and efficiency, and we started pilot projects to prove out the hypothesis

These pilot projects have been very successful. We’ve brought in a senior executive from Johnson & Johnson to take a leadership position in our extended supply chain in engineering.

We are in a position now where we’d like to accelerate many of the pilot projects and initiatives that we have – not only in supply chain but account management or the processing and information technology platform.

We laid that out in the press release, and as I say, Steve will go into a little more detail in a second. The objectives of this program continue to be to improve on our efficiency of all of our back office operations.

As many of you know, we have leveraged tremendously in our outsource model – these third party vendors for all of our manufacturing facilities management in terms of logistics, with the exception in North America, and all of our systems infrastructure, where we use IBM as a facility management.

So it’s very scalable, and what we would like to go do, moving forward in this initiative, is to further globalize and streamline all of our business processes from extended supply chain to logistics and information technology.

We see a significant opportunity to improve profitability, and this coincides with our objective to improve return on invested capital and, particularly driven by improved cash flow, working capital management and EBITDA margins.

So we will certainly answer any more detailed questions on this initiative, but first, I would like to hand it over to Joel Ronkin to talk about our North American Fragrance unit.

Joel Ronkin

Thank you, Scott. I’m going to provide an overview of the performance of the North American Fragrances group; comment on the current retail environment and provide some comments on the outlook for Q4.

As Scott mentioned, our North American Fragrances group is about 50% of the overall sales of the company. It includes our department store fragrance business in the U.S., our mass business in the U.S., our e-commerce business, which is growing nicely, and our businesses in Canada and Puerto Rico.

For the third quarter, which is traditionally a slower quarter, as Scott mentioned, in the fragrance business, net sales for the quarter were 1.5% lower than last year, and year-to-date our net sales were essentially flat compared to the first three quarters of the prior year.

This performance overall is very reflective of what we see of the retail sales performance across our various channels.

In Prestige department stores, the retail sales of fragrances continue to soften; year-to-date it’s down almost 8.5%, which is a pretty significant drop, according to NPD, which tracks fragrance sales for the entire category.

Our business had it actually done a bit better this past quarter with net sales essentially flat to last year and down about 12% for the first three quarters. Just remember we were down more than that coming after the first half.

We mentioned on our last call that we sold in fewer promotional sets and had better sell-through this past holiday season. And what that did is that we have less return exposure for our business in Q3.

Inventory levels in the Prestige arena are moderate, and we see that the resellers are quickly adjusting inventory levels in response to changes in retail sales, and that’s true, really, in all channels.

Now, in terms of our North American mass group, which is our biggest sales group, we had a slight decline: 1% in net sales this quarter as compared with last year; and year-to-date net sales were up 3%.

The sales comparisons really are a story of each retailer, and they vary greatly. In general – and it really is a generality − chain drug retailers are either flat to up quite a bit in retail sales, while the mass volume retail chains continue to experience slower retail sales that we saw in Q2.

Some of our mid-tier accounts are showing better signs in terms of sales. In fact, one of them – Kohl’s – we have an increase year-to-date of 25% in retail sales of our brand. Similar to the retail sales, inventory levels vary from retailer to retailer, as you would expect, and in general, though, buyers have been cautious on inventory levels.

As Scott mentioned earlier, we did see that a number of our key retailers replenishing orders in Q3 lag behind the retail sales, and what that indicates to us is that they are taking a conservative view in terms of inventory, and we don’t necessarily think that’s going to change throughout the remainder of certainly this fiscal year.

From a brand perspective, Mariah Carey continues to shine as a celebrity. You’ve probably seen she just launched her new album, E=MC2 on April 23, and she has really been all over the networks. She had recent appearances on Regis and Kelly, American Idol, Oprah Winfrey, Saturday Night Live.

She performed in Times Square for Good Morning America, and perhaps most importantly for us, hopefully all of you have seen the great Macy’s commercial that Macy’s is running, which feature Mariah and, most importantly, also feature Maria spraying our fragrance brand, M by Mariah.

As a result, we’ve seen improved rankings really across all of our Prestige departments store chains. In fact, in Macy’s, we’ve seen the rankings jump anywhere from 5 to 15 spots, an its biggest store, its flagship at Herald Square, we’re actually the number 11 ranked brand. That really has been a nice addition for us.

In terms of capitalizing on the success of the brand when we had the launch, we’ve introduced this new version called Mariah Carey Gold, which I mentioned in the last conference call, and really, it’s provided newness and animation at the counter.

These conference calls I typically talk about the Britney Spears brand. We get a lot of questions about it, even though, overall, it’s less than 10% of our net sales.

For this past quarter, sales globally were down about 10% in the Britney Spears brand; were actually up in our U.S. mass business. Our year-to-date sales of her brands were down about mid-single digits, in total, and actually up internationally. So, overall, holding up fairly strongly.

In terms of the fourth quarter – and we have mentioned this, I believe, in the press release – we have a number of positive developments in our mass business, in particular. We have several new owned and distributed brands that are going to piping into the mass accounts. In fact, it’s 6 new launches, and we expect to have healthy pipelines.

In addition to that, we are fortunate that we’ve just reopened a couple of new accounts for mass. And so that should help, as well.

Looking into fiscal 2009, I just wanted to mention to you, one of our big launches, which is going to be the Rocawear fragrance, it’s a men’s fragrance designed around the Rocawear fashion label, which is associated with the musician Jay-Z. We’re excited this is our first significant Prestige men’s launch in quite some time.

And what we’re pleased about is it’s really an opportunity for us in men’s to really grow our business where we don’t have as big a portfolio. And the men’s market has been growing much more quickly than the women’s market, recently.

Our partners over at Iconix and at Rocawear – they’ve been great to work with. We’ve been collaborating with them and Jay-Z and really think it’s going to be something special. Most importantly, our retailers’ reaction to the brand has been great. And we expect great things from that in the fall.

So, with that, I will now turn it over to Steve Smith, our CFO.

Stephen Smith

Thank you, Joel. With respect to our operating performance for the third quarter this year, gross margin was down 180 basis points versus the prior year, primarily due to the higher allowances given on some of our older brands to mass customers in both the U.S. and the U.K., and higher allowances given to our retail partners and which are reflected as a reduction of net sales, for activity such as co-op advertising and sales support.

Product mix also contributed to the margin compression, as gross shipments of distributed fragrances were up about 9%. Skin care was slightly up, to about 3%, but down versus our expectations. Color was essentially flat, and our own fragrance brand portfolio was slightly down by about 3%.

SG&A expenses were up about $1 million on a year-on-year basis for the quarter, and they were up as a percentage of sales due to the sales compression. Included within SG&A expenses are one-time and discreet amounts of approximately $5 million, including:

A restructuring charge of about $1 million for various different actions;

The unfavorable effect of foreign currency translation of about $2.8 million;

And we incurred about $1 million of costs related to our supply chain initiatives.

As an aside, the supply chain initiative costs on a year-to-date basis are about $4 million.

Additionally, we continued to invest in Europe, specifically the set up of our French and German affiliates, and in China, where we’re growing significantly; the e-commerce and also our 5th Avenue store.

As we have discussed on prior calls, these investments are behind initiatives to expand our presence and support opportunities that are growing the fastest. Our direct spend in our brands was up about 60 basis points for the quarter, and the increase is actually 160 basis points when you consider the costs for co-op advertising and salary support that are netted against sales.

Our pure G&A expenses, excluding the effect of what I had just highlighted, are essentially flat in constant dollars year-on-year. So we’ve been able to manage our overhead costs for another quarter.

While we benefit from the weakening of the U.S. dollar relative to foreign currencies, we do have hedges in place for a portion of our euro, pound sterling and Canadian dollar cash flows.

Our euro hedges negatively impacted our results this quarter, given the actual sales volume achieved in Europe relative to the notional amount of the hedges since last year, when the dollar was much stronger. The loss on the collars for the quarter was $2.7 million and is $5.8 million year-to-date.

I would like to spend a few minutes providing you an update on our Global Efficiency Engineering project that we have spoken about on previous calls. This project encompasses both our extended supply chain and global infrastructure. As a reminder, these areas are approximately two-thirds of our global cost and expenses.

We continue to be hard at work on many initiatives in order be more efficient and effective in our extended supply chain; how we plan, procure, manufacture, distribute and resupply our customers; and in our global infrastructure.

Pilot programs were set up in the customer service, sourcing, materials management, sales account management, sales and operations planning and logistics. The pilot programs have been extremely successful, and we are tracking favorably against metrics and benchmarks established.

We intend to accelerate the reengineering of our extended supply chain function, the implementation of new business processes and the reengineering of other business functions to best support these new processes.

The second step in the reengineering of our global business process was a comprehensive review of our enterprise software application and our key transaction processes.

Our JVA and associated systems are outmoded and have limited ability to accommodate our business growth. After conducting a thorough review, it became clear that a major investment in our core technology platform is necessary.

After exploring many systems, we’ve decided that JD Edwards, the transactional processing system, which is part of the Oracle platform and allows for its shared services model, is best suited for our business needs.

This shared services model will simplify our transaction processing; it will utilize one common platform, and it will deliver globally consolidated transactional processing. It will also enable us to become more efficient, allow us to centralize these and, potentially, other back office functions.

In connection with these activities, we’ll be taking charges of $12 to $14 million before taxes over the next 18 to 24 months, including amounts for severance, relocation, recruiting and temporary staffing and are expected to be incurred primarily in fiscal 2009 and 2010.

Of this amount, approximately $1.1 million is expected to be recorded in our fourth quarter fiscal 2008. This is all in addition to the $1.1 million recorded in the third quarter for other activities.

Additionally, we currently estimate the capital cost of the JD Edwards implementation will be about $18 million through fiscal 2011, of which $3 million will be expended this year.

We currently expect that the above programs will result in annualized savings of $10 to $12 million through fiscal 2009, and then $13 or $15 million through fiscal 2010, as compared to our current cost and operating model.

These savings are a combination of gross margin improvement, operating expense improvement and reduced interest expense from working capital improvements.

Speaking of working capital, from a liquidity perspective, our credit line was down $17 million, to just under $98 million, as compared to the prior year. As we mentioned on our last call we expected and have significant cash generation from our working capital during the quarter, and our DSO improved by 2 days as compared to last year.

We were about $15 million ahead of our forecast for the quarter. Through March, on a year-on-year basis, our operating cash flow has improved by about $50 million, if you normalize out the inventory that was acquired from Sovereign as part of that acquisition.

Also, on a year-to-date basis, we’ve repurchased about $7.5 million of stock, most of which was during the quarter. We’ve also been controlling our inventory purchases, and our inventory levels are essentially on plan.

Between this significant milestone and our positive cash generation, we feel confident that our supply chain initiatives are taking hold. Given the reduction in our annual guidance, we now see operating cash flow in the $55 to $60 million range.

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

Scott Beattie

Thank you very much, Steve. Operator, we will now be happy to answer any questions.

Question-and-Answer Session

Operator

Our first question is coming from William Chappell - SunTrust Robinson Humphrey.

William Chappell - SunTrust Robinson Humphrey

Good morning. First, on a clarification. When you’re talking about the restructuring savings, it’s $10 to $12 million in fiscal 2009, and then an incremental $1 to $3 million in 2010 – is that correct?

Stephen Smith

Yes, that is correct.

William Chappell - SunTrust Robinson Humphrey

And then, second, would you expect most of the savings to fall to the bottom line? Or are you planning on reinvesting that into SG&A or other parts of the business?

Scott Beattie

It will be a combination of both. We’ve got our guidelines in terms of EBITDA margin and return on invested capital, and obviously, we want to drive that, as well as drive the brand portfolio.

One of the key initiatives we’ve talked about in other conference calls is the allocation of capital to our fastest growing regions and fastest growing brands across our portfolio. So that capital will be redeployed in order to maximize that, as well as improve our return on invested capital.

William Chappell - SunTrust Robinson Humphrey

And then, any idea of how the savings will break out between gross margin and SG&A?

Scott Beattie

I don’t think we have got it; we haven’t pro forma’d those kind of things. I can give you an idea of where some of the elements of the savings are. We’ve got a combination of reduced inventory levels which will result in, obviously, improved working capital and reduced carrying costs on inventory.

You’ve got improvement in gross margin through better fulfillment and lower costs in terms of order processing and distribution. In terms of the SG&A line, you’ve got streamlining of personnel and overhead costs associated with the business processes.

So it will affect multiple lines. And we’ve also, in terms of our operating savings, outlined the direct savings. We’ll also have reductions in inventory that will generate one-time cash flow improvements over the next several years, so we will see that flow into our business.

William Chappell - SunTrust Robinson Humphrey

Just, finally, on overall business trends: I know you’re not giving guidance for fiscal 2009 at this point, but are you assuming that you can grow the top line ex-currency? And, if not, or if so, are you looking to scale back the number of launches or advertising promotion – just with the weak consumer – just trying to adjust accordingly?

Scott Beattie

We’ve, obviously, experienced a number of these kind of slowdowns throughout the history of this management team, and typically what happens is the first step is that the inventories at retailers are normalized to reflect what the forward view of that retailer is of consumer takeaway. We have experienced a lot of that during this third quarter, and we expect to continue to experience that as we go through the fourth quarter.

Over time that starts correcting, and our major retailers start normalizing, and even in some cases, building a relatively low inventory level.

We have a track record of growing our business consistently over the last 20 years, and I don’t really see fundamental weakness in our brand portfolio per se or the growth drivers that we have put in place, so I anticipate us being able to continue to grow the top line into 2009 and beyond.

William Chappell - SunTrust Robinson Humphrey

So, no change in your launch schedule at this point?

Scott Beattie

No.

William Chappell - SunTrust Robinson Humphrey

Great. Thank you.

Operator

Our next question is coming from Arnold Ursaner - CJS Securities.

Arnold Ursaner - CJS Securities

Hi, good morning. Scott, looking at your sales guidance, it implies a down Q4. Can you give us your sense of the breakdown of the decline between domestic and international?

Stephen Smith

The sales guidance is essentially flat, and right now we are looking at businesses that are anywhere from slightly down to slightly up. So, essentially, it’s kind of flat, and that’s true across the different parts of the business.

Arnold Ursaner - CJS Securities

Mechanically, if your sales are going to be up 1% to 2% for the year, sales in Q4 would be down 2% or more. That’s simple math.

Stephen Smith

For us, it’s slightly different. And we did some rounding in the 1% to 2% bit.

Arnold Ursaner - CJS Securities

And, in the past, you’ve given operating margin goals. Given the various moving parts, can you comment where you see your operating margin trending over the next year or year and a half or so?

Scott Beattie

Our intention, as I mentioned before, is to get that 10.5% percent is the first goal, and then beyond that. And I think the reengineering programs that we have in place going into 2009, 2010, will, as planned, will achieve those goals, but, obviously, it’s subject to top line growth, as well. That just contributes to the leverage of our overhead.

But our goal is still to reach, as a short-term target, that 10.5% EBITDA margin.

Arnold Ursaner - CJS Securities

You mentioned you repurchased some shares in the quarter. What was the end of quarter share count, please?

Scott Beattie

End of quarter share count. Marcey, do you have that?

It was 27,800,000, I think.

Arnold Ursaner - CJS Securities

Fully diluted?

Scott Beattie

We’re just getting that for you, Arnie.

Arnold Ursaner - CJS Securities

My final question is on your accounts receivable, in the conference call you had in February, you mentioned they had jumped to $125 million in December, but you also mentioned you had collected $110 million in cash in January alone. Yet you had a pretty good jump in accounts receivable at March 31. Can you perhaps walk us through some of the factors there?

Scott Beattie

A timing of sales during March. We do do some shipments of things like Mother’s Day, particularly during that later part of that first quarter. So I am sure it is just the timing, within the quarter, of the sales.

Stephen Smith

DSO was down 2 days, based upon quarter-end receivables, versus prior year.

The share count information – because you asked diluted shares – the diluted shares number for the quarter is 27.9 million shares.

Arnold Ursaner - CJS Securities

Yes, but the end of quarter, because to build the model on a go forward?

Stephen Smith

Shares issued at 30.5 million shares, and the treasury stock is about 1.9 million shares.

Arnold Ursaner - CJS Securities

Okay, thank you.

Operator

Our next question is coming from Jason Gere - Wachovia Capital Markets.

Jason Gere - Wachovia Capital Markets

Good morning. Just a clarification on the restructuring. I am assuming the timing was always planned for now, or is it that because you are seeing more of a slowdown in the category, did you move up the timing of the planned restructuring?

Scott Beattie

No, we didn’t. And that’s why I wanted to provide a little background in terms of the timing. We started this process in the fall of 2007. And it’s just part of the natural course of moving from the pilot program to an accelerated, more enterprise-wide implementation of the Global Efficiency initiative.

Jason Gere - Wachovia Capital Markets

But even in terms of the severance and on the personnel side; I understand more on the supply chain side, but just maybe in terms of the personnel – I just wanted to make sure that that wasn’t any kind of change over maybe the last six months or anything there?

Scott Beattie

No, no.

Jason Gere - Wachovia Capital Markets

And then, just a second question. In terms of on migrating the new software application, do you anticipate any disruptions along the way that could affect in terms of sales projections or anything along that side?

Scott Beattie

No, we don’t. We’ve got a very experienced group of people. This is a very proven enterprise application. It’s really the standard in many companies like Avon and so on. In fact, we’ve hired a senior IT executive from Avon to join us to help with the implementation of this project.

We are also very closely coordinating the implementation with both our partners at IBM and Oracle and JD Edwards. As I say it’s a proven package within the consumer product industry. There’s thousands and thousands of implementations.

We’ve been planning for this for the last several months, and we have a plan in place of implementation that I think is very thorough.

Part of the reason we want to accelerate the restructuring of some of our business process is we want to move towards a shared services model prior to implementation of the application software, which will start in August of fiscal 2009.

Jason Gere - Wachovia Capital Markets

And then, shifting gears, no pun intended here, but in terms of thinking about the U.K. market, U.S. Prestige and in U.S. mass, where are you more comfortable with the inventory levels? Where do you think we are just going to see a little more malaise as it continues? And which of the three do you think you can recover a little bit quicker?

Scott Beattie

I would say in terms of inventory levels, I think Joel’s comments are reflective of that. It varies a little bit by retailer, but I do think that a lot of the excess inventory, as a result of the weak Christmas, are now being normalized through all three of those markets.

The U.K. probably is a little slower in terms of that recovery process. Going forward, in terms of recovery, traditionally, when we’ve gone through this sort of slowdown, what we’ve seen is our mass retailers, and particularly, our mass volume retailers, have recovered and prospered more quickly than department stores have.

Joel will make a couple of comments on that.

Joel Ronkin

Yes, in particular some of the retailers that have been hit the worst in the past couple of quarters – particularly, mass volume retailers – when you look back in history in our category, they are the ones that have really grown their market share during these kind of times.

Speaking to those retailers, they are seeing this as an opportunity for their overall businesses, as well as our category. So we are actually encouraged; we just need it to kick in now.

Jason Gere - Wachovia Capital Markets

And then just a last question. With your stock down almost 20% today, are you going to get more aggressive with repurchasing stock?

Marcey Becker

I would say we balance our cash between paying down an offer lines, repurchasing shares and acquisitions. As Steve said, we took opportunities during Q3; we purchased about $7 million of our stock when the prices for it were low.

Jason Gere - Wachovia Capital Markets

Thank you.

Operator

Our next question is coming from Rommel Dionisio - Wedbush Morgan.

Rommel Dionisio - Wedbush Morgan

Yes, good morning. I wonder if I can just ask a few questions in regards to the Rocawear launch. First, is that going to be a global launch? (Inaudible) But then maybe if you could also share with us the planned number of doors here in the U.S?

Also, is it a men’s and women’s launch? I think you had mentioned that in the past, but I think in your prepared comments you just talked about the men’s.

And, finally, just the timing of that. Will you start to see selling during the September quarter, or is that more of a December quarter event, please? Thanks.

Joel Ronkin

In terms of the launch, it’s going to be a men’s launch, initially, and it will be in around August. I won’t give you too many details as far as which account and things like that, but you can expect a full Prestige department store of distribution for the launch. Really a strong support here in the U.S.

Rommel Dionisio - Wedbush Morgan

Will that be a global launch, as well?

Joel Ronkin

It will be in certain markets. And what happens is, generally, it goes over time, internationally; some markets earlier than others.

Rommel Dionisio - Wedbush Morgan

But, generally, in time for the holiday season, then?

Joel Ronkin

That is correct.

Rommel Dionisio - Wedbush Morgan

Good luck with that. Thanks a lot.

Operator

Our next question is coming from Joe Altobello - Oppenheimer & Company.

Joe Altobello - Oppenheimer & Company

Good morning. Just want to go back to comments you made earlier about the top line for the fourth quarter. It sounds like you’re looking for flat to up in the June quarter, and I’m looking at how your top line has been trending since the middle of calendar 2007, let’s call it, and you were up 4% ex-foreign exchange in September, flat in December, down 6% in March.

So it sounds like you’re thinking this is probably a one quarter blip, and things will recover in the June quarter. I’m curious, if you’re seeing anything in April that would give you a little more comfort there?

Scott Beattie

I wouldn’t necessarily follow that argument, Joe. As Joel mentioned earlier, the fourth quarter tends to be a little bit larger for us, because many of our mass retailers recheck planograms for the fall season. And, as a result, we have new items flowing to the planograms in mass during the fourth quarter, as well as cascading of brands, which includes new launches and so on.

So, you’ve got some of that dynamic happening, as well, during the fourth quarter. In terms of retail takeaway and the general retail environment, I think we’re being pretty cautious in terms of this fourth quarter. We don’t see any dramatic improvement, particularly, in the U.S. retail environment.

Joe Altobello - Oppenheimer & Company

Because it sounds like at least, sequentially, you’re looking for a bit of an uptick?

Scott Beattie

That’s coming from those pipelines and new launches and some of the resets that you have in planograms.

Joe Altobello - Oppenheimer & Company

Got it. Is there anything that’s different about this slowdown or downturn you have seen historically?

Scott Beattie

I think it’s not just us, but if you just look across all consumer product companies and retailers, is that clearly the U.S. consumer, their disposable income’s being pressured by inflation in food and in high energy prices, and, at some point, other retail-, discretionary-type items get pressured.

Joel and I were at a number of meetings this past weekend at the NACDS, National Association of Drug Store mass retailers, and met with senior people of many retailers, and there’s a very common theme that, despite even comp store increases or comp number increases, most of it is either coming from foreign currency and foreign exposure to emerging markets or inflation price increases through the food business or through their energy business.

So, in terms of the units across traditional categories, it’s a tough environment for consumers right now in the United States.

Joe Altobello - Oppenheimer & Company

It just seems like the beauty category and specifically, the fragrance category has typically been a little more defensive than it seems like it’s going on now.

Scott Beattie

Again, what we tried to emphasize, both Joel and myself, is that the retail sell-through isn’t as dramatic as our third quarter shortfall in revenues. When you look across our retail customers in North America, particularly, they are flat to up a few percentage points, generally, except for the department store channels, which is weak across their business.

Joe Altobello - Oppenheimer & Company

Okay.

Scott Beattie

But, again, the fragrance category is very strong in the second quarter, at Christmas; and when you have a weak Christmas – and we don’t pay returns in our mass retail business – you have a legacy overhang of inventory that reduces replenishment during the third quarter, and that’s what we experienced.

So our sales number was lower than the actual retail sell-though. And when you combine a very cautious view from these retailers in terms of their overall business, it creates a squeeze on our business. But, I think at retail, the beauty category and fragrance category are much better than our Q3 numbers reflect.

Joe Altobello - Oppenheimer & Company

Thanks.

Operator

Our last question is coming from Alice Longley - Buckingham Research.

Alice Longley - Buckingham Research

I have some questions just to clarify the numbers. I think you said your shipments internationally were 3.8%. So does that mean down about 8% in local currencies?

Marcey Becker

7.5%, that’s correct.

Alice Longley - Buckingham Research

And, in the U.K., you said down 12.5%. Is that in dollars? What was that in local currencies?

Marcey Becker

I don’t think we gave out U.K. specifically, Alice.

Alice Longley - Buckingham Research

I thought you did. All right, I’ll call you later on that.

Scott Beattie

I think, Alice, what I did is, I said Europe was down 12.5%.

Alice Longley - Buckingham Research

Oh, Europe was down 12.5?

Scott Beattie

Yes, and that was primarily just the U.K..

Alice Longley - Buckingham Research

And what was that local currencies?

Marcey Becker

About 19.5%.

Scott Beattie

That was almost all fragrance.

Alice Longley - Buckingham Research

All right. And how much of Europe is the U.K.?

Joel Ronkin

It is about 60%, Alice.

Alice Longley - Buckingham Research

About 60%. Thank you. And then, the numbers that Joel gave for the third quarter for North American Fragrances – I think he said down 1.5%. How does that compare to North America being down 4%?

Marcey Becker

The total North America number that Scott provided include our U.S. Prestige business, the Elizabeth Arden counter business at U.S. department stores.

Alice Longley - Buckingham Research

So, the down 1.5% – is that your shipments or your sales at retail?

Joel Ronkin

That’s our shipments.

Alice Longley - Buckingham Research

And what does that down 1.5% include? It doesn’t include department stores?

Joel Ronkin

It includes department store fragrance counter – not the Elizabeth Arden counters for cosmetics and skin care.

Stephen Smith

And that business was down similar to the department store fragrance piece, about 16%.

Alice Longley - Buckingham Research

Okay, and you said mass down 1%, and that’s your shipments?

Joel Ronkin

Yes, we said mass was down 1%; that was our shipments.

Alice Longley - Buckingham Research

But at the beginning of the call you said North America down 4% and mass down 2.2%?

Marcey Becker

U.S. mass down 2.2%, including Canada and Puerto Rico – we include that in North America.

Alice Longley - Buckingham Research

All right. And the final question: could you tell us how fast mass fragrances are growing in the quarter at retail? In other words Wal-Mart’s shipments, Wal-Mart’s sales to the consumer – something like that.

Joel Ronkin

Yes, I think I mentioned, in general, they’re up a bit better than our sales, but I can’t give you anything about any specific retailer like Wal-Mart.

Alice Longley - Buckingham Research

But they may be flat to 2% or something like that?

Joel Ronkin

As I said, it varies widely, like chain drug is on average more than that; mass volume retailers are down a bit. It really is a mix, but overall, your average is probably about right.

Alice Longley - Buckingham Research

At retail, growing 0% to 2% at mass in the U.S., at retail?

Joel Ronkin

I don’t have that number, but it’s a good estimate, but I don’t have a number in front of me.

Alice Longley - Buckingham Research

So that’s you gut feel, is that that might be right? And you think chain drugs are up and mass down within that number?

Joel Ronkin

Chain drugs and mass volume retailers – mid-tier is actually up a bit.

Scott Beattie

The Kohl’s, Penney, Sears-type business.

Alice Longley - Buckingham Research

But mass merchandisers might be down a little bit.

Joel Ronkin

Yes.

Alice Longley - Buckingham Research

Excellent. Thank you very much.

Operator

There are no further questions at this time. I’d like hand the floor back over to management for any closing comments.

Scott Beattie

Thank you very much, operator. Thank you very much everyone for joining us today. And we look forward to our fourth quarter conference call in mid-August.

Operator

This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.

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Source: Elizabeth Arden, Inc. F3Q08 (Qtr End 03/31/08) Earnings Call Transcript
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