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Executives

Erica Pettit – Financial Dynamics

Bruce Crain – President &CEO

Anthony Cappiello – Exec. VP & Interim CFO

Analysts

Richard Whitman – Benchmark Capital

Arnie Brief – Goldsmith & Harris

David Liebowicz – Burnham Securities

Glen Sussman – [Latide Asset Management]

Mark Cooper – Wells Capital Management

Dave Thomas – Blue Sky Asset Management

Russ Berrie and Company, Inc. (RUS) Q1 2008 Earnings Call May 13, 2008 10:00 AM ET

Operator

Good morning ladies and gentlemen and welcome to the Russ Berrie and Company conference call. (Operator Instructions) I would now like to introduce your host for today’s conference, Ms. Erica Pettit of Financial Dynamics; please go ahead.

Erica Pettit

Good morning everyone and welcome to Russ Berrie’s first quarter 2008 conference call. If you have not viewed the press release issued this morning and would like to receive one by email please call Financial Dynamics at 212-850-5600 and someone will send you one immediately.

As stated in the company’s earnings release this call is being webcast and can be accessed on the company’s website at www.russberrie.com. The webcast of the call will be archived online shortly after the conference call for 90 days. A replay of the call will be available through May 20th, 2008, by dialing 800-642-1687 access code 46484608.

We will begin the call with comments from management and then we’ll open up the line for questions. Before we begin we would like to remind everyone of the cautionary language regarding forward-looking statements contained in the press release. That same language applies to comments made on this morning’s conference call.

Now I would like to turn the call over to Bruce Crain, Chief Executive Officer and President of Russ Berrie. Bruce, go ahead please.

Bruce Crain

Thanks Erica, good morning and thank you for joining us everybody. It’s been just over a month since our last call, so we’ll try to keep our remarks brief today. I’ll start out with a brief review of our recent highlights, then Anthony Cappiello, our Chief Administrative Officer and Interim Financial Officer, will provide a more detailed discussion of our financial results. Later I will come back and discuss some of our strategies for the year.

We achieved modest year-over-year improvements during the first quarter as we grew our top line. We continue to make solid progress on our design led and branded product strategy. This has been an over-arching priority for our businesses which also helps to offset some of the pressure from the macro economy. As we all know the consumer environment is changing and has become even more challenging compared to 2007. In particular, our cost of finished goods are increasing driven mostly by our suppliers’ rising raw material and labor costs as well as the impact from currency.

With this in mind we must be prepared to protect our businesses from these external factors that are affecting many retail and consumer products companies. That said I believe we have the right strategies in place to do just that while we continue to grow our business and prudently manage our expenses in this less-then-ideal consumer and retail environment.

Now I’d like to briefly review some of our recent highlights from both segments. First, we announced the acquisitions of LaJobi and CoCaLo at the time of our last conference call and we successfully completed those on April 2nd. Both LaJobi and CoCaLo are innovative and complementary businesses that really are an excellent fit for our Infant and Juvenile segment. By the way, our Infant and Juvenile segment I’ll be referred to as the I and J area going forward here today.

LaJobi and CoCaLo are already adding value to our business with their own design-led and branded product lines. We are very excited about the early collaboration among our various I and J businesses as well as the future opportunities. LaJobi has allowed us to enter the important crib market as we seek to leverage their strong brands and extend our presence throughout the baby nursery. CoCaLo has expanded our presence in the infant bedding and accessories market with their distinctive product designs and unique brands.

To further capitalize on the positive trends of this recession-resistant at least infant and juvenile industry, we plan to further leverage these newly acquired businesses as well as well as Kids Line and Sassy. I’ll spend more time discussing the acquisitions later in the call.

Second let me highlight a few of our many accomplishments in our gift segment which were encouraging given the difficult gift market. Those of you who follow Russ gift closely know that the key gift trade shows occur early each year in the first quarter. At those shows we remained very focused on our design-led and branded strategies to ensure that our products are distinct, trend right and allow us to leverage our brand strength. At the trade shows we launched several new product lines that fit with this strategy including Sea Pals, a new line of viral plush product to continue addressing the popularity for plush products featuring a web-based component.

Further Sea Pals is designed to bring together all of the best features available in the viral category including educational, nurturing and of course fun components, all within a safe web environment complemented by great plush products. This proprietary line will begin shipping out to retailers in the second quarter and we plan to launch the website during the quarter as well. We remain optimistic about our new gift products for this year.

At the June and July trade shows, we will also be launching a full assortment of new products including hard goods gift products and particularly new items and programs within our already strong plush offerings. We will update you on these new launches during our next earnings call. You may recall that last year at this time, we consciously limited our new introductions as we focused more of our attention on the Shining Stars launch. This year we expect to have a more comprehensive line of new gift products to introduce to the market.

On the topic of Shining Stars, let me update you on some recent highlights for that product line. We are seeking new ways to reach our diverse customer base as we begin to anniversary the launch of this product. We re-launched our Shining Stars website in early April, which will now be able to rollout in a variety of other languages. We expect to launch Spanish language version of the site later this month, with other languages to follow. We are pleased with this initiative and expect that it will enhance our international distribution. The Spanish language site will clearly also help us reach the large and growing Hispanic market in the US.

This brings me to my last highlight for the quarter which was the performance of our international businesses. This continues to be a bright spot for Russ Berrie and demonstrates the broad consumer appeal of our brands. We remain very pleased with our performance in the international markets, particularly as the US economy is weakening. During this quarter this business was a key driver of profitability for both segments, particularly in Australia where both our segments performed quite well.

So in conclusion we will continue to move forward and execute on our strategic initiatives efficiently as we remain cautious on our outlook for the year. Now I’ll turn it over to Anthony for details on our financial performance before I discuss our outlook for the remained of 2008 in more detail.

Anthony Cappiello

Thanks Bruce, as Bruce mentioned we are pleased during the first quarter to maintain our financial operating performance which was driven by our solid business model. Additionally our focus on developing design-led innovative products and expanding distribution in both our operating segments continues to be beneficial. However the overall retain environment remains challenging and has impacted our business in the near-term. That said I’d like to address some of our financial highlights for the quarter.

Consolidated net sales for the first quarter increased 1.1% to $75.9 million compared to $75.1 million for the first quarter of 2007. This was primarily a result of higher sales in our infant and juvenile segment as well as strong international sales in both segments. It is important to note that while our gift segment sales were down on a year-on-year basis, they were in line with our internal plan for this business. We prepared ourselves for soft sales in the first quarter due to holiday 2007 trends and the overall macro environment. This allowed us to properly manage our capital structure.

Consolidated gross profit in the first quarter was $30.6 million or 40.2% of net sales compared to $31.3 million or 41.7% of net sales for the first quarter of 2007. Infant and juvenile segment margins were negatively impacted by market pricing constraints, a shift in product mix and higher cost of goods. Gift segment margins remained relatively unchanged.

Consolidated SG&A expenses for the first quarter were $27 million or 35.5% of net sales compared to $26.5 million or 35.2% of sales in the first quarter of 2007. The slight increase is a result of increased product development and promotional costs to support the growth of the infant and juvenile segment. We also continue to invest in our brands and our design capabilities. With that said, given the environment we are being very cautious with most discretionary expenses.

Consolidated net income for the first quarter of 2008 was $2 million or $0.09 per basic and diluted share. Despite challenges in the retail environment we have been able to improve our accounts receivable performance since year-end as well as compared to the first quarter of 2007 to our focus on disciplined financial management. Year-on-year we have seen a nine-day improvement in our AR days from 80 to 71.

Finally let me say that we were particularly pleased to secure our expanded infant and juvenile credit facility which provides additional flexibility for this business segment. As a result we were able to close the LaJobi and CoCaLo transactions as planned. During the first quarter we paid off the remaining [inaudible] consideration of $3.6 million related to the company’s 2004 acquisitions of Kids Line, [Thor Infant and Juvenile and inaudible]. I would like to now turn the call back over Bruce for his closing comments.

Bruce Crain

Thanks Anthony, let me close today by reviewing our growth and operational strategy as well as our plans for LaJobi and CoCaLo during this year. Despite the current environment we plan to continue to aggressively focus on organically growing and positioning our business for future success. At this time we continue to invest in the areas of our business that we believe are vital to our long-term health. One of our core areas for focus is on design-led and branded products. We believe that this will continue to be a key differentiator for our company in good and challenging times.

We are maintaining our commitment to innovation with our products across all our businesses while we push forward with this strategy. We are creating trend right products under our own brands including Russ, Applause, Shining Stars, Kids Line and Sassy, and we’ll also now include some of our newest brands including LaJobi and CoCaLo. Additionally we are able to leverage licensed products to enhance existing relationships with our retailer customers and consumers while we also seek to establish new relationships using these well-recognized brands.

As you may know our licensed brands include Curious George, Raggedy Ann and Andy, Corduroy, Carter’s and Leap Frog, and now after our recent acquisitions we also gained additional licenses. This includes Graco for cribs, Serta for mattresses and Baby Martex for infant bedding. Further we continue to invest in the expansion diversification of our distribution channels especially in international markets. We also continue to expand our sales channels to include business-to-business and web based offerings.

Finally we remain focused on executing our marketing programs to further support and develop awareness for our brands. Again this is key to strategically growing our business for the long-term. However we also have to protect our business in the near-term. Given the environment we are mindful that we must adjust some of our plans to ensure we remain on the right track. This includes careful cost management and pricing efforts on our part. As Anthony mentioned we have identified certain expenses where we can be more conservative. We are also proactively taking action to reduce discretionary costs across all our businesses.

In addition as we stated earlier our cost of goods are rising driven by higher raw materials and labor costs as well as the impact of currency. In fact like many others, we expect that certain costs will continue to rise during the year. As always we continue to work with our retailer partners to offset the impact of higher costs by increasing pricing as appropriate.

Now I’d like to spend a moment updating you on our recent acquisitions. We completed the acquisitions of LaJobi and CoCaLo and their results will be reflected in our financial reporting beginning in Q2 2008. Again we are very pleased with the early indications for growth from both businesses. Thus far we are seeing two very resilient businesses with excellent people. They continue to achieve results in a difficult macro environment and needless to say we are very encouraged by their performance. As we look to maximize our portfolio brands, we’re focused on achieving the most appropriate synergies between Kids Line, Sassy, LaJobi and CoCaLo.

With that said we have identified a variety of areas that would benefit from collaboration among our I and J businesses and we are aggressively executing on these. First we mentioned in our last call, that sourcing across all of our businesses would be a key focus for us as we aim to create cost structure that is even more efficient and allows us to enhance our service levels. We are working diligently to further diversity our sourcing initiatives both within China and beyond.

As an example, with acquisitions like LaJobi we expect to make additional headway in this area by using some of their sourcing operations outside of China. This could be helpful for all our I and J brands and is an avenue we are exploring in our ongoing effort to manage costs and streamline operations. Second we’ll be able to leverage our existing retailer relationships across all our businesses including now LaJobi and CoCaLo, which have been developed over many years. This presents another way to expand our distribution channels and enter new markets. As we progress throughout the year we anticipate we will begin to both realize the benefits of these efforts and capture other operational and market synergies from the acquisitions.

In closing like most consumer product companies, we are cautious about the near-term however we are confident that we have the right product and the right plans in place to help offset external macro economic pressures. Most importantly we believe we are doing what it takes to deliver long-term shareholder value. We generated solid momentum in 2007 and we’re now looking forward to building on that during the remainder of this year 2008.

Now I’d like to turn it over for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Richard Whitman – Benchmark Capital

Richard Whitman – Benchmark Capital

Back in June of 2007, the company put out a press release saying that they had received an unsolicited offer to buy the company. The price was $18.00, the company deemed it insufficient. They further stated that they were exploring the sales of the gift division and had “indications of interest” from perspective buyers and that you had hired an advisor to explore possibilities including sale of the company or divisions or acquisitions. Since that time, we have not seen a follow-up announcement as to what conclusion you had come to with your advisor, could you just tell us strategically where you intend to go and what the status of that agreement or whatever discussions you’ve had with advisors and where that has gone.

Bruce Crain

I don’t think we’re going to use an earnings call to make any public announcements of any sort and I would say just as a general comment we continue to look at lot at a variety of acquisitions. We look at divesture stuff and we continue to explore all of those strategic alternatives. I think if and when we’re ever ready to make an announcement, we’ll make one. But it’s a regular process that we continue to go through to assess where we’re going with different parts of the business. So I would just say that all of those subjects remain things that we certainly look at as a management team on an ongoing basis. As you can see a result of that was announced at the last call with the acquisitions of LaJobi and CoCaLo, so I think those are pretty important things and I think when we get to the point where we have any other announcements we will put those out.

Richard Whitman – Benchmark

Are you still working with the advisor though, that’s what I’m trying to hone in on? Are you still using an advisor to explore strategic alternatives to your current business model?

Bruce Crain

We have a constant process that goes on and we absolutely have a variety of advisors we’re using for various efforts that we look at. I don’t think we’re going to announce each and every time that we bring somebody on or some relationship changes, but that’s an ongoing process with a variety of advisors. As you probably know I joined here in early December and obviously I’ve revisited a lot of those efforts from last year and I wasn’t necessarily part of all that history but it continues to be something we look hard at and I think is part of our growth strategy and part of our capital structure and everything else we continue to engage appropriate outside people to help us look at that stuff.

Operator

Your next question comes from the line of Arnie Brief – Goldsmith & Harris

Arnie Brief – Goldsmith & Harris

The one number in the report that confuses me and I had the same question in the fourth quarter actually, but its even more so now in the first quarter, your SG&A level of $19.7 million versus $34 million in sales just seems so inconsistent with or seems so high relative to the sales given your third quarter sales of $55.7 million and then if you take out the advertising expense which you didn’t incur in this first quarter, your SG&A then was $18.8 million on $55.7 million, if I look at the fourth quarter, take out the advertising it was $19.3 million on $36 million in sales. If I look at last year, when you had a charge of $400,000 and you were incurring the strategic expenses from looking at strategic alternatives, it was actually considerably lower on $42 million in sales versus the $19.7 million on $34 million in sales. What’s going on—is there anything in that SG&A number that’s non-recurring or unusual and I don’t understand why it’s not running at $17 million or $18 million.

Anthony Cappiello

I’m a little confused at your question, because we are consistent with the prior year. In 2007 in the first quarter we spent $19.7 million, we are spending in the first quarter this year $19.6 million.

Arnie Brief – Goldsmith & Harris

Right but last year you had $42 million in sales, you had a $400,000 charge and you had a considerable amount of expenses from exploring strategic alternatives, none of those are repeating so you’re having—if you make the adjustment you actually have higher SG&A this year versus last year on lower sales.

Anthony Cappiello

Our sales last year were directionally about the same number. We were down a couple of million dollars year-on-year in sales for the first quarter as was mentioned in my commentary. The expenses are in line, so I’m not sure what numbers you’re looking at because there’s no—

Arnie Brief – Goldsmith & Harris

Last year had an unusual expense of $400,000 from closing a warehouse and you had other expenses from exploring strategic alternatives. Those are non-repeating and if I take those out you say your SG&A last year was well under $19 million on a comparable basis on higher sales.

Anthony Cappiello

I would say the $400,000 is insignificant but we do have some small additional charges in the first quarter of 2008 like stock-based compensation and things of that nature that we didn’t have in 2007 but nothing of the magnitude but in the range of $400,000 which you’re talking about year-on-year, yes, so I would say that they’re still comparable year-on-year even with the small level of unusual items. I’d be happy to go further with you offline but for this call I don’t really see any major issue here.

Arnie Brief – Goldsmith & Harris

Well this one I’ve got to disagree with you on because again taking out the advertising from the third quarter of last year you had $55 million in sales and a comparable level of SG&A—

Anthony Cappiello

But now you’re comparing the third quarter to the first quarter and we’re comparing here first quarter to first quarter, consistency with that level of expenses and consistent with our seasonality of our business, consistent with our sales levels. If you’re going to challenge this quarter then you’re actually challenging the expenses a year-ago in the first quarter which we’ll talk about.

Arnie Brief – Goldsmith & Harris

Your inventory was $54 million, down from $59 million in December but up from $48 million last year on lower sales and Shining Star—I’m just wondering whether you have Shining Star inventory that’s a problem in there or not because Shining Stars sales have slowed up.

Anthony Cappiello

A big piece of the increase in inventory is on the infant and juvenile side of the business to support new product initiatives that we have there specifically in our Sassy line where we have a couple of new initiatives like Leap Frog, Baby Gear and Earth Brights where we’re directionally up $2.5 million, $3 million. There’s some additional increase in I and J for the international growth for Australia and we do have some small level of Shining Star inventory in our gift business.

Arnie Brief – Goldsmith & Harris

Not a problem, you expect to work it off by the second or third quarter?

Anthony Cappiello

We do.

Arnie Brief – Goldsmith & Harris

You mentioned in your 10-K you talk about Shining Stars sales likely to decline, to what extent—I’m not quite clear to what extent you’re looking at that in terms of the US and to what extent you factored in the international business and the Spanish market and to what extent if any and do you see any impact of the reworked website that you’ve just reopened, in other words, a statement was made prior to these things actually developing and I’m just wondering how much have you factored in those additional developments into the Shining Stars projection?

Bruce Crain

I don’t think we’re going to get into detailed numbers on Shining Stars on this call but the international will become a more important relative market as we go forward but there was not a lot of growth because we did not have all the languages in place a year ago. Those will now be increasingly, be put in place with Spanish being launched here in the month of April and further languages coming throughout this year. So the relative mix will go up we believe but international is still a relatively small piece compared to domestic. Domestic is still an important part of Shining Stars we believe despite the fact that it will not be able to repeat the initial launch year; it will still be a very important part of our mix going into this upcoming year. As we all know there are some issues out there in the market with a lot of this type of product. We have a good plan we think to work through that but it won’t—its tough when you’re anniversarying a line that was that successful in year one. I think again, I think we’re feeling quite comfortable that Shining Stars will be a very, very important part of the business mix this year. It just can’t or won’t repeat at the same levels.

Arnie Brief – Goldsmith & Harris

Could you give us some idea of the—you’ve mentioned a bunch of new products and it’s not clear in my mind when some of them will start to impact, some of the Sassy gear products as an example. I don’t know what you’ve got going in I and J in new products, when will they actually start to impact the sales trends?

Bruce Crain

The second half is a pretty important part of our mix, but if you look even at prior year somewhere north of 55% of our sales last year were in the second half so it is a relatively more important part of the year compared to the front part of the year. So I think just overall volumes there and on top of that you’ve got I and J growing at a relatively higher rate of growth so in general I think the second half of the year you’ll see a lot of that. Within I and J specifically different then gift, it isn’t really a seasonal business so there’s a constant flow of new product being introduced there. I think the most important venue where you might be able to see some of that product and really understand it, this year 2008 the JPMA and the ABC show are consolidated into one show which I believe is in September this year in Vegas and that will be the big industry show where a lot of introductions are brought forth. But really in our I and J front it’s a constant flow of new innovation in that business. It really is the essence of the business is new design, new product and now with LaJobi and CoCaLo we really take it up to another level of new introductions.

Anthony Cappiello

I agree with what Bruce basically said, it will be in the second quarter, third quarter. We’re starting to see some of it now. Even in juvenile business in the first quarter is up directionally over 7% so we’ve seen some of that success already hit but the majority of pieces will come—on our Russ business our Sea Pals will come in in the second half of the year which will—late third quarter early fourth quarter we should see some increase there from the new product in the gift business.

Bruce Crain

And again, those will be—really I think again one differentiation as I mentioned in our comments here year-over-year we spent a lot of time, energy and it was quite successful working on Shining Stars last year with the gift business. One of the issues that came up that we introduced a very skinny line of gift product at last year’s mid-year shows as we focused both working capital and selling efforts on Shining Stars. This year we’ll have Shining Stars, we’ll have Sea Pals, but as I said in my comments we’ll have a lot of additional product we’ll be bringing to market this year that we did not have in the marketplace a year ago and again the June, early July trade shows for gift I think will be particularly robust with gift offerings this year.

Operator

Your next question comes from the line of David Liebowicz – Burnham Securities

David Liebowicz – Burnham Securities

The two acquisitions closed two days after the end of the quarter, could you give us a revised balance sheet based on the acquisitions in terms of both debt and equity numbers?

Bruce Crain

I think the first time we’ll have a balance sheet out will be the end of Q2 when we report those results. There is no—we did not own those in Q1. I’ll let Anthony make a further comment on it.

Anthony Cappiello

We’re not prepared in this call to restate balance sheets or whatever with that information but we will be coming out June 8th when we file the 8-K, we’ll be coming out with that information which is coming within the next 45 days or so.

Bruce Crain

Somewhere in the month of June within the reporting, all the LaJobi information will be out.

David Liebowicz – Burnham Securities

Also the first quarter, what percent of your revenues and earnings came overseas?

Anthony Cappiello

Between 25% and 30%.

David Liebowicz – Burnham Securities

And what was the impact of foreign currency translation in terms of revenue and earnings in the first quarter; that’s not given in the press release.

Anthony Cappiello

About $1 million.

David Liebowicz – Burnham Securities

So revenue would have been down in the first quarter and earnings would have been down by an incremental $0.02 a share or do I have that wrong?

Anthony Cappiello

No, the question I answered was what was the affect of the sales line—and necessarily wouldn’t drop all the way down to the bottom line.

David Liebowicz – Burnham Securities

Well you got a pick-up on earnings from international business on a translation so if I yank out that translation gain, I’m estimating it’s a $0.01 to $0.02 or am I wrong?

Anthony Cappiello

Well you’re right except that we have a detriment on the expense side for the same translation so we lose the expense portion of that and our cost of sales is in dollars and we lose a little bit there. So there is a pick-up but its no where near dollar for dollar, directionally its not even half. Probably in the range of 15% to 25% would potentially drop to the bottom line.

David Liebowicz – Burnham Securities

Okay so then it would be $0.01 a share on the bottom line and we’d be down on the quarter by about $300,000—?

Anthony Cappiello

Directionally I won’t argue with your numbers.

David Liebowicz – Burnham Securities

Okay the two new items that are web-connected, when do they hit shelves?

Bruce Crain

Sea Pals is the most important of those, some initial shipping will happen at the tail end of June but basically it’s a Q3 is when most of that will happen. It’ll be obviously highlighted at the mid-year trade shows but we’ve been out in the marketplace and the earliest shipments arrive in the latter part of June and we’ll be pushing some of that right back out the door. But I think you’ve got to expect that that will really be Q3 activity. If that’s the one you’re talking about, Shining Stars will continue throughout the year and we do have some other product that—

David Liebowicz – Burnham Securities

You showed two a Toy Fair.

Bruce Crain

Yes, there’s another one called [Treachers] and again that’ll be the back part of the year. That one is a product that has kind of an environmental twist; plant a tree. And again that will be the back part of the year before we see that. That will be relatively a smaller introduction versus Sea Pals in the marketplace.

David Liebowicz – Burnham Securities

And have you already started expensing the websites or will that be expensed when they go online?

Anthony Cappiello

We normally capitalize the websites but its non-material costs. We’re not spending more than $200,000 or so on Sea Pals but it’s normally capital.

Operator

Your next question comes from the line of Glen Sussman – [Latide Asset Management]

Glen Sussman – [Latide Asset Management]

You mentioned in the 10-K and the 10-Q that MAM sales will be down $20 million to $25 million in 2008, I’m assuming that the last three quarters, first quarter sales were normal. What base is that off of?

Bruce Crain

The MAM—we terminated the MAM contract but we actually run absolutely normal throughout 2008 with that contract, runs basically to the tail end of 2008 and it really would be a 2009 impact. So we really feel we have quite of bit of runway to adjust that business. So there’s sort of a notification of termination and then there’s a wind-down period which includes all of 2008.

Glen Sussman – [Latide Asset Management]

What was the total sales base for 12 months prior to you terminating the contract?

Bruce Crain

We don’t breakout Sassy sales specifically and again out of the K I think you’ll find that $20 million, $25 million is a pretty good chunk of our I and J business but again we feel pretty comfortable given that we’ve got nearly a year to work with alternate products through that channel and through that company. There are several reasons, we believe the economics—you’re mentioning the sales line, the core issue is really twofold for that contract. One was the fact that it was all the product basically was sourced out of Europe and therefore was euro-denominated for us. And so there was really no margin left in the product based on the way the contract was put together given that we were absorbing all the currency impact up at these ranges where the euro is trading against the dollar. So again there’s a sales impact but from an earnings impact we actually think this is a pretty positive development and there were also some restrictions in this contract that restricted us from doing certain other things which we would then be relieved of at the end of the wind-down periods at the end of 2009 in places beyond that.

Glen Sussman – [Latide Asset Management]

But the issue it seems to me is if you don’t replace it with new product you’ve got overhead absorption because it is such a large percentage of the segment.

Bruce Crain

Absolutely and again that’s why we’re pretty comfortable having this amount of time to start building alternate lines and again I think if you see the offerings from Sassy we’re feeling pretty good about what we can do about that given the amount of notice period that we have and some of the efforts we’ve got in the market in there.

Glen Sussman – [Latide Asset Management]

It looks like inventory in the fourth quarter got about $10 million out of line; you cut that up by my guess to about $5 million out of line, should it start to look like more historical trends as we work through the next couple of quarters?

Anthony Cappiello

Well the big increase in our inventory and it’s been on the I and J side of the business and it really is to support the growth initiatives there. I talked about some of it but there were increases in the Kids Line business above a million dollars when you look at December 31st year-end numbers. And there’s a small modest increase in the gift business but nothing that we’re concerned about.

Glen Sussman – [Latide Asset Management]

In the Q you put out this morning it looks like there was some confusion on the gross margin on whether or not it was up or down in the gift business. It looks like it was down 30 basis points although it read up 30 basis points; I just wanted to make sure directionally I have that right.

Anthony Cappiello

The gift business for the first quarter should have been directionally flat.

Glen Sussman – [Latide Asset Management]

Its 44.9 versus 45.2 so down 30 bits although it read the opposite.

Anthony Cappiello

That sounds correct.

Operator

Your next question comes from the line of Mark Cooper – Wells Capital Management

Mark Cooper – Wells Capital Management

Just remind me the total consideration that you disclosed for the two acquisitions, the cash out today not the earn out, what you paid out for those.

Bruce Crain

The rough numbers that we’ve disclosed and they were in the disclosure documents that came, on LaJobi it was just under $50 million, $47 million and that’s pre the earn out consideration that could come over at the end of the year period and with CoCaLo it was $16 million in total and plus there’s an earn out that would again three years out based on performance metrics that are I think pretty elaborately disclosed in the K.

Mark Cooper – Wells Capital Management

And you have not talked about the sales add –

Bruce Crain

The LaJobi numbers in detail will be disclosed I think it’s within whatever 75 days of the deal structure and that will come out and CoCaLo is sort of below the reporting thresholds; we won’t be disclosing those numbers at the detail level.

Mark Cooper – Wells Capital Management

So we’ll see the other one here shortly.

Bruce Crain

Yes, all that stuff is together we’re just going through all the final pulling together of those numbers.

Operator

Your next question comes from the line of Dave Thomas – Blue Sky Asset Management

Dave Thomas – Blue Sky Asset Management

I am looking at the monthly uniques on your website and I see that there’s been a significant decline on the Shining Stars traffic, its gone from roughly 500,000 unique visitors to 157,000 compared to your competition [Webkins] which has actually grown since January and during the same period gone from five million to close to six million. I’m wondering if you can speak more to the decrease in the Shining Stars sales that you’re seeing and that you reported in this report?

Bruce Crain

I’m sorry; I’m not familiar with the specific stat that you’re picking up. What period of time are you talking about in the stats?

Dave Thomas – Blue Sky Asset Management

I’m specifically looking through the first quarter initially at the beginning of the first quarter you saw a peak of about 450,000 unique visitors and then it dropped precipitously down to about 157,000 currently and again your competition’s numbers actually have been growing slowly since then during the same period.

Bruce Crain

I think we’d have to do a little checking on the numbers if I want to overly respond, we did come out of Christmas which is a big selling period for us which would have—we’ve got a little bit of a unique product the way our structure works because on your initial purchase you go through the process of registering a star in the Shining Stars world and then you get into more of a maintenance repeat mode as people may or may not come back for the play value and community part of the site. So it’s a little bit of a different structure perhaps as people initially get on but I wouldn’t be surprised by a post-Christmas peaking and then we get more into a run rate on the business. But let’s do a little work and we can come back at you with any better insights on that. I don’t have that data right here.

Dave Thomas – Blue Sky Asset Management

You in your 10-Q say that there’s been a decrease in the Shining Stars sales in 2008 and you expect a decrease; can you quantify that on a percentage basis?

Bruce Crain

We’ve never really broken out any of the detailed sales activity, we just are trying to be clear to people that we had a very big first year of introduction and again as we’ve said consistently year number two here is still going to be a very nice year for us, a very meaningful product line for our gift business both here domestically and increasingly internationally. It won’t repeat at that same initial launch year kind of volumes but we suspect it will still be quite a meaningful number for us in year two but more of a steady state then the initial launch and the initial shelf placements that we would have picked up. There are many, many customers that we’re just now reaching for the first time with the line and internationally again, we’re going at some customers that have never been introduced to the line at all.

We also think and again, I think we’ll have an opportunity to hopefully share a little more input once we get it, it’s just now been all of whatever it was, three weeks, since we reintroduced the site in a pretty fundamental way. Anybody that has a history with Shining Stars, I would encourage them to go and look at the new Shining Stars site. Its pretty dramatically different in terms of its look and feel and we think excitement factor, and now by the end of this month we’ll also have language capabilities and things like that that we think helps us position it somewhat uniquely out there in the market and lets us leverage our international distribution which the Russ gift business has especially in Canada, especially in Europe once we get the language components going on that front.

Operator

Your next question is a follow-up from the line of Arnie Brief – Goldsmith & Harris

Arnie Brief – Goldsmith & Harris

I know you are very hesitant to give guidance but I’m going to ask for a little bit, in the second quarter of last year Shining Stars did $4 million, that was announced at the time of the release, I suspect that will be down substantially this year, is there anything in your plans, cost cutting, new products, that will help to offset that in the gift line. I know the two acquisitions will help in I and J line but in the gift line is there anything going on that would help offset that at all because to date so far you’ve emphasized the new product impact would be mostly in the third quarter. So I’m just trying to get some numbers that would make some sense for the second quarter. And then finally again without getting into any numbers, but just directionally, do you expect the gift business to be in the black this year?

Bruce Crain

At the risk of repeating myself on the gift front, Shining Stars was a very important part of last year; clearly Q2 was really among the most important introductory periods. As I said in my comment, we really did not emphasize core product very much last year in our gift business because on two fronts, we had tremendous selling activities and interest from our retailer base across all our channels with Shining Stars so we really backed off on a lot of our core products. I think when you’re at the June and early July shows I think you’re going to find quite a bit of an enhanced line and that really—that does suggest that within our world of gift that it is the back part of the year that we need to work the hardest on to sort of alleviate some of the success we had last year from Shining Stars.

But we really—as you know, don’t get into individual quarter projections and I don’t think I’m going to start that now at all. But its pretty difficult to repeat the success we had specifically in Q2 but I think we’re feeling—moving on to your question on the overall year, the gift business, its been through a multi year turnaround. I think we’re feeling like all the momentum that we picked up on our profit improvement programs, our PIPs, we’re seeing a lot of the upside of that stuff now and we’re feeling pretty good about the full year. But again we don’t project forward but all the trends that we’ve put in place and all those initiatives I think are now bearing fruit. But we need to go deliver on the selling activities and the sales activities in the back part of the year to realize the benefits that came out of that.

Operator

Your final question is a follow-up from the line of David Liebowicz – Burnham Securities

David Liebowicz – Burnham Securities

In terms of Shining Stars to follow-up, you make it sound as if Shining Stars was really a roman candle and is now making its way back into gravity, do you have reserves set up to get rid of the excess inventory as the year progresses or is this going to be a cumulative at end of year, discontinue the product and clear the shelves?

Anthony Cappiello

We look at all our inventory on a monthly and quarterly basis and look forward at the projected sales for each component of our inventory and if there are any reserves necessary we appropriately take those reserves and we feel that right now that any potential inventory issues are properly reserved for, either specifically or through some other program that we have.

David Liebowicz – Burnham Securities

Last year, fourth quarter, did you have adequate markdown money reserves or did you exceed the markdown money reserves fourth quarter and full year of 2007?

Anthony Cappiello

When you talk about markdown money reserves, we would only need reserves if were going to sell product below our landed cost. We don’t reserve for markdown money which is reduced margin business because that’s not required under GAAP.

David Liebowicz – Burnham Securities

Let me try to rephrase it then, all toy companies start the year and have an accrual entry for markdown money. Some look at it quarterly, some do it on another basis, at the end of the year if the reserve is greater then the markdown money it gets added to the fourth quarter’s earnings. If it is not sufficient there is obviously a further amount of money that is expensed and that reduces the fourth quarter’s earnings. In last year’s fourth quarter which of those conditions did you find yourselves in?

Anthony Cappiello

We had adequate reserves at the fourth quarter at 12/31/07, and we have not in any way come across anything today that says that those reserves at 12/31/07 were not sufficient. And we do have those type of reserves to answer your specific question.

David Liebowicz – Burnham Securities

Well my specific question was did you in fact have greater reserves which then found their way into earnings in the fourth quarter of last year?

Anthony Cappiello

No.

Operator

There are no further questions at this time; please continue with any closing comments.

Bruce Crain

Thank you everybody. As I mentioned at the front end, we’d be a little bit brief today given that we just talked to you recently and I’m hoping today’s results—reviewing the results and our strategies for the rest of 2008 were helpful in terms of additional and useful insights. We look forward to staying in touch as we progress throughout the year. One note on calendar, we do have an annual meeting that is scheduled on July 10th, and our second quarter conference call will be early August and look forward to putting that out in formal releases in terms of locations and dates as we get closer to those times. Thank you very much everybody and we’ll talk to you on the next earnings call. Thanks.

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Source: Russ Berrie and Company, Inc. F1Q08 (Qtr End 03/31/08) Earnings Call Transcript
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