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Elizabeth Arden, Inc. (NASDAQ:RDEN)

F4Q08 Earnings Call

August 14, 2008 10:30 am ET

Executives

Allison Malkin - Investor Relations

E. Scott Beattie - Chairman, President, Chief Executive Officer

Joel B. Ronkin - Executive Vice President, General Manager - North America Fragrances

Stephen J. Smith - Chief Financial Officer, Executive Vice President

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

Analysts

Joseph Altobello - CIBC World Markets

Jason Gere - Wachovia Securities

Analyst for William Chappell - SunTrust Robinson Humphrey

Gary Giblin - Goldsmith & Harris

Operator

Welcome to the Elizabeth Arden fourth quarter and fiscal 2008 results conference call. (Operator Instructions) It is now my pleasure to introduce your host, Allison Malkin of ICR.

Allison Malkin

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 to you. 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 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 provision of the Securities Litigation Reform Act of 1995. Such information is subject to risks and uncertainties that could cause actual results to differ materially from the statements as described in the press release and on Elizabeth Arden’s most recent annual report on Form 10K 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 or other calls may constitute non-GAAP financial information under the SEC’s Regulation G. Reconciliation 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 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.

E. Scott Beattie

Welcome everyone to our fourth quarter and fiscal year-end conference call. Today joining me is Joel Ronkin our Executive VP of our North American Fragrance unit, Steve Smith our Executive VP and Chief Financial Officer, and Marcey Becker our Senior VP of Finance.

Today’s agenda is first of all I’ll provide a summary of our Q4 performance specifically of our international business unit and the global brand performance of the Elizabeth Arden beauty brand. I’ll also provide strategical review of the recently completed Liz Claiborne transaction and a discussion and overview of our 2009 outlook.

Joel will then provide a review of our Q4 and fiscal year performance for the North American Fragrance business which represents about 60% of our total revenues and an update of the integration of the Liz Claiborne business and outlook for his business going forward through 2009, and that will include not only the fragrance launches that we have plans for throughout the year but also some of his strategic initiatives that are driving the performance of his business.

Steve Smith will then provide a review of the 2009 fiscal year-end financial results including a more detailed review of the one-time charges that we incurred during fiscal 08 and some of the one-time charges related to the Liz Claiborne transaction that will affect us during 2009 fiscal year.

In terms of our overall corporate performance for the year, our North American business was essentially flat. I think in absolute percentages was down 1.5%. Our mass business was essentially flat for the year and the US department store business is down about 14%. Internationally that was the strong growth driver for us and I think for the rest of our industry as well. We had a very strong growth in international markets during the first half of the year. Just to remind you, it was almost 20% growth in international for the first two quarters of the year and then we saw declining growth particularly in Europe during the second half of the year. Overall Europe was up 6.6% and APO and the rest of the international business was up 15%.

What we see particularly during the second half of the year is obviously continued weakness in the North American consumer but with a slight decline in that weakness in the department stores. We’re seeing somewhat improvement during the fourth quarter in our department store business in North America. But we expect continued weakness with the US consumer certainly for the first half of our fiscal year Q1 and Q2 and that’s been factored in to our guidance.

A few positive elements in this difficult environment are overall EA brand during the fourth quarter was up 2.5% and we do have certain accounts particularly within our North American mass business that are performing well which Joel will go into more detail with.

On an international basis as I mentioned we’re seeing slowing growth during the second half of the year. The Asia Pacific business which includes our travel, retail and distributor business, that’s about 50% of our total international business. The other 50% would be our European based business. There’s kind of a tale of two stories there. Our travel/retail/distributor business which includes markets like South America and Mexico, Eastern Europe and so on was very strong. For the year it was up 26%; China was up 21% for the year; and travel/retail was up 10% for the year. In terms of Europe was up 2.2% for the fourth quarter and 6.6% for the year but on a constant dollar basis was down slightly. What we’re seeing is weakness in the UK/Spain particularly but some of the other European markets that are smaller for us and we expect that to continue during the first half of 09.

We do see continued strong growth in the rest of the international business particularly travel/retail in Asia driven by China and we’re seeing great performance of the Elizabeth Arden brand in those markets. The Elizabeth Arden brand on a global basis for the year was up 2.5% but internationally it was up 6% and was really pulled down by a weak department store business here in the US.

Most encouraging though was the performance of our skin care portfolio. As you might recall from previous discussions we’ve really focused the Elizabeth Arden skin care and color business around three main pillars: The ceremite anti-aging regime which both has skin care and a color foundation business, the Intervene business which is a skin care and color program targeted at the younger Elizabeth Arden customer, and then the Prevage business which is our cosmeseutical offering. The Prevage business on a global basis was up 15% for the year; ceremite was up 16%; and Intervene although it is a very small business overall was up 45%. In our overall color business despite the fact that we had a number of returns resulting in repositioning the color business with new innovation was up 3%. We’re very pleased with the global skin care performance.

The overall Arden brand was pulled down slightly because of the weakness of the fragrance category and more than anything it was difficult comps because we haven’t launched a new Elizabeth Arden fragrance for over two years. That will change this year. We’re very excited about a new fragrance launch for Elizabeth Arden that will come out this spring. It’s been very well received by our organization and preliminary projections are very positive for the second half, particularly in the international business. So that will help drive the overall Elizabeth Arden performance during 2009.

The second topic I’d like to just briefly discuss is again to just reinforce the strategic rationale of the Liz Claiborne fragrance brand licensing deal. Joel will go into much more detail with regard to the individual brands and the launch schedules, but I’d just like to walk through the rationale for us in acquiring this license. As you might recall we prior to this transaction were the distributors of the Liz Claiborne brands here in the US and the mass retail channel.

The normal course is we convert from a distributor relationship to an owned relationship. The impact for our business is that we have improved control over the distribution of the brands as well as improved control over the inventory management. Obviously by consolidating the inventory production and management into our organization as opposed to us having inventory and Claiborne having inventory will improve the efficiency of that inventory management. It will also allow us to further invest in the brands both in the mass channel as well as in the department store channel and drive additional growth for these businesses internationally. And we’re very excited about the opportunity to improve the international distribution and growth of particularly the Juicy Couture fragrance.

In terms of our overall business we expect our owned versus distributed brand mix to move from about 75% in 2008 to about 85% in 2009. That will help drive improved gross margins and as I said improve the control and management of the brands.

One other real key opportunity for us is the improved productivity of our North American fragrance sales force and I’ll let Joel go into more detail about the economics and opportunity to improve the performance of our brands when he goes through that.

In 2009 what we expect overall for our business is modest growth in our base business on a global basis. We expect to see the continued weakness with the US consumer. We do expect to see continued growth in our international business with the exception of certain of the European markets which we see weakness in. But our growth is going to be modest across our existing brand portfolio and obviously significant double-digit growth as a result of the integration of the Liz Claiborne brand portfolio. We see improved department store productivity and economics particularly in our fragrance department store business here in North America.

And I’m very confident that we’ll see continued improvement in our EBITDA margins and our cash flow performance as a result of leveraging the supply chain and logistics and efficiency implementation that we have. I’d like to go through briefly right now an overview of those two initiatives.

As we stated in our press release we expect between $10 million and $12 million of earnings improvement driven by the global supply chain re-engineering initiatives. That’s been factored into our guidance. We announced at the end of Q3 that we would take a $12 million to $14 million restructuring charge which we would take over the next 12 to 18 months. As you see from our press release we’ve drawn down $3 million against that $12 million to $14 million in restructuring charge during the fourth quarter and that essentially results in the alignment of the organizational group within supply chain and logistics and leadership of that group. We’re on track for our cash flow and earnings savings for 09 and we expect those savings to continue to be very accretive to EPS and cash flow as we move into 2010 and 2011.

In terms of the J.D. Edwards project we’ve completed the preliminary planning stage with Oracle and IBM assisting us in that. That involves the functional design and redesign of certain of our business processes to adopt to the J.D. Edwards implementation. We don’t expect any modifications to the J.D. Edwards system. As Steve will go through it’s really the conversion of our global financial accounting and order to cash business functions so it’s quite straight forward in the implementation. We’ve fully implemented this J.D. Edwards solution in our China business and it’s working very effectively so we’re very comfortable with the plan to convert to the J.D. Edwards financial accounting system by July of 09 and then the order to cash system by January of 2010. This will provide us with a global transaction processing and financial accounting system that will dramatically improve the processing efficiency and many of our business processes which will help drive down on a global basis our general and administrative overhead and will help drive profitability and cash flows in 2010, 2011 and beyond.

So on that note I will hand it over to Joel Ronkin who will go through a review of the Liz Claiborne brand portfolio and the North American fragrance business.

Joel B. Ronkin

I’m going to briefly comment on the North American fragrance group overall, the addition of the Claiborne brand to our portfolio, the highlights from the new launches that we have which really is an unprecedented level of launches, as well as comment on the outlook for the first half of fiscal 2009. As Scott mentioned the North American fragrance group currently comprises about 60% of our overall company sales. It includes our department store fragrance business in the US, our mass business in the US, our e-commerce business which is growing very well, and our businesses in Canada and Puerto Rico.

For the fourth quarter our net sales for this group were down mid-single digits as compared with last year. For the full year as Scott mentioned we were down ever so slightly to 1.5% and this is roughly consistent with the flat retail sales we have seen in our various channels over this past fiscal year. The North American mass business experienced a decline in net sales in the fourth quarter as compared with last year and flat sales for the fiscal year. The general trends that we saw in the third quarter continued into the fourth quarter with chain drug retailers flat to up in retail sales including a couple of retailers up double digits in our brands particularly CVS and Kohl’s and mass volume retailers a bit lower. These second half trends were similar to what we saw throughout the year as well with again chain drug retailers in the high single digits as far as retail sales and mass volume retailers showing declines of single digits.

Now on a positive note, each year we measure our prestige fragrance share versus mass fragrance share both in terms of retail dollars as well as shelf space in the mass market. And what we found this past year was that prestige fragrances grew in terms of both dollars as well as shelf space the past year which is a very strong indicator of future growth. In a minute I’ll talk about our outlook more specifically for the upcoming fiscal year. Now for the full fiscal year, the department store fragrance business was down 7% in net sales which is consistent with the weakness that we experienced throughout the year. On a positive note retail sales in the prestige channel did tend to get a bit better in the April through June months than the January through March months. That being said, department store buyers and in fact all buyers at this point are taking a cautious view as far as inventory levels.

Now as far as this upcoming fiscal year, we are very excited about the license agreement we signed with Liz Claiborne for their fragrances. The integration is very much on track; all of the inventory has been transferred to our facilities; we’re already receiving and shipping orders of Claiborne products from our Roanoke warehouse facility; we have combined the Arden and Claiborne department sales forces in the US; and we were fortunate in that process to be able to strengthen our sales team by taking many of the best Claiborne sales people with many of the best Arden sales people and really maintain the overall same number of people. We’re also very pleased that the Claiborne marketing team which has been responsible for so many successful brand launches is now located in our New York offices including Art Spiro who is the President of Liz Claiborne’s fragrance business and who will lead the development of these brands globally going forward.

Now let me just go through some of the brands. Juicy Couture which is of course the usually successful and trendsetting designer brand was the biggest launch ever at Bloomingdales at its debut in 2006 and ranked in the Top 10 women’s brands ever since the launch in all department stores. Juicy is currently the number six ranked women’s fragrance in department stores. And we just launched the men’s brand under the Juicy name called Dirty English and it launched at number one at Bloomingdales this spring and is in the Top 5 launch brand for the season. We’re also very excited about a new women’s brand we’ll launch in the fall, Viva la Juicy which I’ll comment on in just a second when I talk about our new launches.

Other brands in the Liz Claiborne portfolio include Usher’s men’s and women’s fragrances. This celebrity fragrance was launched last year and achieved the number one spot among men’s fragrances for the fall season. It ranked number 14 for the full year and is currently ranked fourth overall in department stores. Hopefully you guys have seen the Macy’s commercials that feature Usher with Martha Stewart and his fragrance. He’s always promoting the fragrance. In addition we’ll be launching Limited Edition Usher brands for men and women this fall in prestige department stores and we expect those to help drive growth of the franchise.

The Liz Claiborne brands also include the iconic Curve brand for men and women. That brand was introduced in 1996 and the Curve men’s brand has ranked as the number one men’s brand for at least the last seven years which is as long as we’ve been monitoring overall ranks in the mass market. Now of course it’s nice that we have the number one women’s brand as well, White Diamonds, which has been number one for as long as we’ve been able to track that as well. So we now have the number one ladies’ brand as well as the number one men’s brand at mass market and they’re number one by a fairly wide margin.

There are other brands in the Liz Claiborne portfolio including Lucky brand, Reality’s Bora Bora and Mambo. We really believe that the Lucky brand which has continued to be a Top 10 ranked brand in mass for the last five years has great potential for growth. Overall in the mass channel Liz Claiborne’s men’s brands hold seven of the Top 50 retail sales rankings including as I mentioned the number one ranked brand Curve while the women’s brands hold five of the Top 50 rankings. So this meshes very well with what we already had a high number of the Top 50 brands on both ladies and less so on men’s but still a strong performance on the men’s side.

In addition to improved profitability the addition of the Liz Claiborne fragrances to our own portfolio has many strategic benefits for us. Let me just go through a few of them for you guys.

The increased gross margin will allow us to better invest behind our brand to provide more support to our retail partners. Probably the most significant impact of this acquisition will be to our prestige department store business. In this channel adding the Claiborne business allows us to better leverage our sales infrastructure and provide more in-store and advertising support behind our brands.

We’re going to over double our business this year while keeping overheads roughly flat. This will of course allow us improved profitability but perhaps more importantly reinvest behind our brands. Also, our primary approach at Arden in driving retail sales in department stores before the acquisition was really using national and co-op advertising. On the other hand, Claiborne really drove their business through the extensive use of in-store selling assistants as well as co-op advertising. So combining all of our brands together as one business will be able to utilize those selling assistants to support all of our brands including our existing brands like the White Diamonds and Mariah Careys as well as to increase our national advertising support behind our entire brand portfolio.

In this process we’ll be doubling our sell-through coverage at department stores from 1,000 doors to 2,000 doors and we’re also of course becoming more important as a company with retailers in the prestige department store channel and will give us more opportunities to partner with them.

I’ve talked a lot about the Claiborne impact to the US business but perhaps an even greater opportunity are the Claiborne brands’ impact on our international business. I think Scott had alluded before to the fact that Juicy is a great opportunity for our international business and one of the things that we see as a real value added for us and for Claiborne is that Claiborne before did not have an international structure. They operated strictly through third party distributors. We have a significant international infrastructure and have our own offices and significant sales and marketing staff in the key international markets. So we don’t need to operate through distributors and we believe we’ll be able to much better perform in those markets. The Juicy franchise we’re working with the apparel organization to expand internationally as they expand their apparel business. We also have high hopes that the Usher and Curve brands will perform particularly strong in international markets like Europe.

Now we had in our guidance modest expectations for the Liz Claiborne brands internationally and that’s largely because we’re transitioning out of the distributor arrangements into an arrangement where we sell directly from our affiliates as well as the fact that we want to build these brands properly.

Now from a supply chain and logistics perspective we’ll have more leverage with suppliers to help drive lower costs. We’re obviously going to put more volume through our logistics and supply chain infrastructures which makes them more efficient and reduces freight, it reduces processing costs per order for ourselves as well as our retail partners, and it’s important to note that these efficiencies are on top of the efficiencies we had already planned as a result of the reduction in customization of our product offerings and improved forecasting.

I mentioned before that we had an unprecedented launch schedule in department stores and let me mention just a few of them. One is Mariah Carey’s Luscious Pink which already has shipped into department stores and hopefully you’ll see the visuals soon. The retail reception to this brand has been very positive but it’s still too early to tell.

Viva la Juicy that I referred to earlier under the Juicy franchise we expect to be a very, very strong brand for us. The marketing and selling support for this brand will be significant; it will be authentically Juicy. The reaction has been great. It’s already performing very well at Bloomingdales and at Nordstrom’s.

We also are going to launch new additions of the Usher brands for men and women called Usher UR and that will happen in September. It’s going to be well timed because he is doing a lot of activities out in the media with his new album that just released in June. So far our orders that we’ve received are above expectations so we’re hopeful that will continue.

Rocawear 99 which is the first brand in the Rocawear men’s fragrance portfolio is something we’re very excited about. You may recall that Rocawear is a fashion label that was started by music mogul and business man Jay Z. It’s really considered a lifestyle designer brand. It’s edgy and urban and celebrates the hip hop culture. It’s targeted to a multi-ethnic man aged 16 to 30 who are urban culture fans who also enjoy his music. The support for the launch is designed to capture the consumer in his environment with video, scent strips and targeted magazines, radio and text messaging and social networking. We really think the campaign as well as the packaging is extremely innovative.

So you can see our launches are very balanced. We have three women’s launches and two men’s launches, three of which are “celebrity” brands and two of which are designer brands. We expect these launches to constitute about 30% of our sales at department stores for fiscal 2009 and needless to say we’re very focused on delivering successful launches for these brands right now.

I also thought it would be important to touch on one of our existing franchises, the Britney franchise. Overall her brand portfolio is holding up very well. We actually exceeded budget for the fiscal year with the brands performing particularly well outside the US. For the year global sales were down mid-single digits. We’re also very encouraged with the various initiatives Britney and her management team are working on and we’re working closely with them to find creative ways to further grow our Britney brands. You’ll also see the Britney Spears Believe brand cascading into mass in the next month or so and we expect it to perform very well.

And finally let me just touch on our outlook for 2009. Our expectation for the first half of fiscal 2009 is that the current weak retail environment will continue with modest declines overall in retail sales. The weak economy is helping us however with our mass channel where consumer traffic is picking up and that should translate into stronger performance during the holiday season in that channel. There is a complicating factor in the first half view this year which is we have one less shopping week between Thanksgiving and Christmas compared to last year.

In our prestige business we’ll offset the retail environment with all the strong launch activity I just talked about as well as better in-store support of our existing brands. In our mass channel there is significant opportunity for growth although last year we worked with a number of our largest mass retail accounts to drive the growth of this category and are implementing a number of initiatives this year to create better awareness for the category as many consumers don’t even realize prestige fragrances are sold in those channels. And we’ve also worked to improve the in-store look. This includes better visuals, signage and displays and also better and more systematic placement of our holiday programs in preferred locations within those stores.

So overall we expect sales growth for the North American fragrances business to be largely consistent with the guidance provided by the company for the year which is 12.5% to 14% sales growth. That will largely be driven by the Claiborne brands addition, our new launches, better performance in the category with these new initiatives, as well as the cascading of a number of new brands that we both own and distribute into mass retailers for this holiday season.

With that I’ll turn it over to Steve Smith our CFO.

Stephen J. Smith

I’ll provide an overview of our fiscal 2008 results, update you on our re-engineering projects, and provide comments on our outlook for 2009.

In the fourth fiscal quarter we incurred expenses of approximately $20 million related to the Liz Claiborne licensing agreement. $13 million was for the reimbursement of advertising, marketing and brand development activities incurred by Liz from which we will benefit as brand owners going forward as well as transition expenses. As Joel and Scott mentioned we expect to be largely complete with the transition in our first quarter of 2009. We will continue to require certain planning and purchasing functions for several months during our peak season although the majority of the transition expenses which are estimated between $3.5 million and $4.5 million will be incurred primarily in the first quarter of our fiscal year.

We also recorded non-cash charges related to the Liz Claiborne inventory. Because we were a distributor of their brands we owned inventory at the time of the transaction at a higher cost. We are adjusting the carrying value of this inventory to that of a brand owner from that of a distributor. We recorded $6.7 million in June and the adjustment for fiscal 2009 is approximately $19 million, about $15.5 million of which is expected to be recorded in the first quarter and the remainder in the second quarter. We will break this charge out when we report our results. Again I would like to emphasize that this is a non-cash charge and as we sell the inventory in the future we will recover the margin.

Additionally as a result of adding the Liz Claiborne brands to our product portfolio we reviewed our brand portfolio and discontinued certain marginal brands and products to allow the company to focus on those brands with the best growth and profit potential. Total charges associated with this were $7.5 million of which $4.7 million is non-cash. Adjusted for these charges gross margin would have been 42% for the fiscal year an increase of 110 basis points versus the prior year. Gross margins are expected to approximate +/- 45% in fiscal 2009 again excluding the adjustment for the higher Liz cost inventory as over 80% of our sales are now coming from owned brands and the savings from our supply chain initiatives that are on track and which we will begin to realize through earnings.

Excluding the charges SG&A expense as a percentage of net sales would have been 33% versus 32% for the full fiscal year. Advertising and promotional expenses for the year which is about half of our total SG&A costs increased by 8.4% or about 80 basis points to 16.7% of net sales and that really accounts for the SG&A increase. We expect total SG&A expenses to increase in fiscal 2009 to approximately 35% as a percentage of net sales reflecting additional investments in our existing brand portfolio, launch activity, and now owning the Liz brands.

Cash flow from operations was $50 million on an adjusted basis, $8 million on a reported basis due to approximately $42 million of cash used for Liz related items. Inventory ended the year at $409 million and that includes $45 million of net incremental inventory due to the Claiborne transaction or $364 million on an adjusted basis. This is a reduction of $16 million as compared to the prior year. We do expect inventory to decline in fiscal 2009 by $50 million to $70 million. This reduction will be achieved by the $19 million re-valuation of Liz inventory, being able to reduce Liz inventory further as a result of now having logistics through one US location and the savings from our supply chain initiatives. DSOs were flat with the prior year at 69 days.

We are committed to improving our EBITDA margin and return on invested capital. I believe we can improve our EBITDA margin by 40 to 90 basis points in fiscal 2009 at 9.5% to 10%. The credit facility had a balance as of June 30, 2008 of $119 million and that includes $42 million of borrowings in June related to the Liz agreement, so it was $77 million on an adjusted basis. In July we completed an amendment to the credit facility to accommodate the incremental working capital for the Liz brands. As part of the amendment we increased the size of the facility by $75 million to $325 million. While we don’t currently expect to utilize the entire facility for working capital needs, we’re able to attract extra liquidity due to our solid credit profile and asset based strong banking relationships. This extra liquidity will provide us additional flexibility with respect to share buy-backs and acquisitions. There is no change to the current pricing of LIBOR +125 basis points and the amendment fee was not significant. The Maturity date remains at December 31, 2012.

I’d like to spend a few minutes providing an update on our global efficiency engineering project. The restructuring costs and charges that we outlined on our previous call of $12 million to $14 million are still on track and as planned. The work we have begun to implement the JDE financial system platform continues to progress according to plan. We believe it is important to understand that this initiative should not be viewed as an ERP implementation. We’re implementing new financial accounting and order processing systems which greatly reduces implementation risks and our planning and implementation activities to date have not identified any unexpected issues.

We also continue to see positive results from the supply chain initiatives to reduce costs and working capital and that has been reflected in our guidance. Savings of $10 million to $12 million through fiscal 2009 are also on track. We do expect to reinvest a portion of these savings in our brand portfolio and business during the year.

As far as the capital expenditures we are currently expecting cap ex for the implementation of J.D. Edwards to be about $25 million. The increase from our April call primarily relates to hardware, software and implementation project expenditures that are related to the JDE effort other than the base hardware and software costs that was a basis of the amounts reported on our prior call. It is not what we would call scope [inaudible] or cost overruns. From a cash perspective $14.5 million is expected to be funded in fiscal 2009 which includes $3 million that was originally scheduled for fiscal 2008. For fiscal 2009 we expect total capital expenditures to be in the $40 million range. As a result of increased cap ex our depreciation and amortization for the next fiscal year is expected to increase by about $2.5 million over 2008. Interest expense however is expected to remain flat as the increased borrowings for the incremental Claiborne fragrance working capital will be offset by inventory reductions. Our annual EPS guidance assumes an effective tax rate of 28% and 29.2 million shares outstanding.

As Joel mentioned we have a number of fall launches which will impact the SG&A expenses in the first fiscal quarter and again as always we manage our business on six-month horizons with many of our initiatives having even longer planning horizons.

With that I’ll turn it back to Scott.

E. Scott Beattie

We’re available to answer any questions now.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Joseph Altobello - CIBC World Markets.

Joseph Altobello - CIBC World Markets

On the Liz quarterly flow here if you look to fiscal 09. How much of the incremental Liz revenue do you expect to see in the first half of the year versus the second half?

Stephen J. Smith

I think that’s sort of reflected Joe in the guidance that was in the press release. We provided the guidance for the first half of the year.

Joseph Altobello - CIBC World Markets

Yes. I’m just trying to figure out if it’s 60%, if it’s 65%. Is that the ballpark figure you’re looking at?

Stephen J. Smith

Yes. It’s consistent with the overall business.

Joseph Altobello - CIBC World Markets

It sounds like at least at the retail level in the US the department store channel started to see some improvement. How did Europe flow throughout the June quarter? Was it worse towards the end or did you see some level of improvement there?

E. Scott Beattie

I would say that it wasn’t significant one way or the other. It was kind of continued weakness during the second half and what we’re seeing through the summer and into the first half of this year as I mentioned was continued weakness particularly in the UK and Spain and France and Germany markets.

Joseph Altobello - CIBC World Markets

Obviously the Liz deal, at least in our eyes, looks pretty good. Are there other similar potential deals out there where you’ve got a captive fragrance business within a fashion house of this size?

E. Scott Beattie

The answer I would provide for that is that we’ve done probably somewhere between 10 and 20 of these kinds of acquisitions over the years where we acted as a distributor for the brand and then ultimately acquired the business. There are certainly lots of those opportunities that continue to exist, not just in North America but internationally. Obviously with the number of new launches you have in fragrances on a global basis, it creates opportunities to acquire these brands over time. So that will continue to be a growth driver for us as it has been over the last 15 years.

Joseph Altobello - CIBC World Markets

Are these similar in size to the Claiborne?

E. Scott Beattie

Well they’re different sizes. The size isn’t as critical to us. It’s really the quality of the brands and what we feel we can do with those brands on a long-term basis. So we obviously aren’t interested in very small businesses but we are interested in classic fragrances from $25 million and up on a global basis and brands that have been around that we feel that we can fold into our portfolio and provide to our different channels of distribution.

Operator

Our next question comes from Jason Gere - Wachovia Securities.

Jason Gere - Wachovia Securities

The first question is I want to talk about the inventory levels, where they are in the department store and even at the mass channel? I remember at the third quarter they were getting more normalized. I just wanted to maybe talk about the sell-through that you’re seeing there?

Stephen J. Smith

We’re seeing pretty much consistent with the retail sales being slightly ahead of net sale end. So that continues as retailers just try to continue to close the gap on the amount of inventory they have but it’s not a significant difference.

Jason Gere - Wachovia Securities

Has there been any change with trade allowances or anything at that point to move products around?

Stephen J. Smith

No.

Jason Gere - Wachovia Securities

I’m very pleased that 30% of your department sales for this upcoming year are going to come through new initiatives. One of your competitors at the department store channel this morning was talking about scaling back some of the launches. So I was just wondering if you could put into context what you’re seeing in terms of the new product launches out there and the comfort especially in the context of the first half of the year with the weak consumer being a little bit more cautious.

Joel B. Ronkin

In terms of what we’re seeing out there, every year the competitive landscape increases at prestige department stores with the number of new launches. That’s no different than it’s been. For the last five or six years we’ve seen that. But we’re not seeing any pushback in terms of the reception to our brands as far as the new launches. I think the one area that we will be cautious on is the spend associated with the launches that obviously we’ll track very closely, the sell-through and the performance of the launches and we’ll be maybe a little bit more cautious in terms of the spend because of the weaker economic environment.

Jason Gere - Wachovia Securities

How quickly can you turn that on or off going into obviously the all-important holiday season?

Joel B. Ronkin

We can in terms of the launches. Some obviously you made commitments for certain associated spends but there is some discretion in that so we can manage a portion of that budget certainly.

Jason Gere - Wachovia Securities

Can you talk a little bit more about the efforts on the mass channel? Obviously I know who you are referring to but in terms of being able to expand that shelf space and bring more attention to the category. And have you seen flow coming from the department store shopper to the mass channel and how big do you think that can get?

Joel B. Ronkin

We are seeing some modest transference of customers to that channel. It’s still too early to see a big change but I think you’ve seen in some of the results that have been announced by these retailers’ strong results and obviously we benefit by that being such a significant part of the category in almost all of the major mass retailers. I think that trend will if anything get greater as we get closer to Christmas because remember so much of our sales are made between Thanksgiving and Christmas.

Jason Gere - Wachovia Securities

So we would be able to see some stepped up efforts over maybe the next four months or so a little bit more of that transformation?

Joel B. Ronkin

That’s correct.

Jason Gere - Wachovia Securities

The savings with the Liz transaction, is that more of a 2010 when you would see those benefits coming through? I know this year you’re talking more about the restructuring and the global efficiency of savings coming through. I guess putting it into the context of the 10.5% EBITDA target, it sounds like you’re looking at anywhere between 9.5% and 10% this year so I was just wondering about getting to that 10.5% threshold.

Stephen J. Smith

You’re right. We’ll see the Liz related savings really start to kick in in fiscal 2010.

Jason Gere - Wachovia Securities

What are you assuming for fx this year after the top line?

Marcey Becker

Assuming current rates and we have to remember that we have hedges in place for our year on pound sterling denominated cash flows which are our largest exposures.

Jason Gere - Wachovia Securities

How much did that impact? I know you called it out last quarter. Did that have any impact to hedge this quarter?

Marcey Becker

Yes, it did. We had the hedged rate at par year rate so it netted out against the pickup we had on the other side but the hedges themselves we lost money on, a couple million dollars this quarter.

Jason Gere - Wachovia Securities

So then for fx for just for modeling purposes should we just assume that’s going to be flat to slightly down?

Marcey Becker

Yes.

Operator

Our next question comes from Analyst for William Chappell - SunTrust Robinson Humphrey.

Analyst for William Chappell - SunTrust Robinson Humphrey

Relating to the European destock issue that impacted the third quarter, how much was fourth quarter impacted by this?

Joel B. Ronkin

Typically as I mentioned in the third quarter conference call particularly on the fragrance side which we saw a lot of growth in the first half of fiscal 08, when you have a weak Christmas there tends to be more destocking of inventory during the third quarter. So most of that was normalized during the third quarter and we got back to more stable volumes during the fourth quarter. But at the same time I think we generally saw a weaker economic environment building in the fourth quarter and into the first half of this year in Europe. So we didn’t see a significant improvement in the operating performance.

Analyst for William Chappell - SunTrust Robinson Humphrey

Have you implemented any price increases or do you expect to in fiscal year 09?

Joel B. Ronkin

Yes, we have both domestically and internationally.

Operator

Our next question comes from Gary Giblin - Goldsmith & Harris.

Gary Giblin - Goldsmith & Harris

Este Lauder noted a robust travel/retail business. Did you find the same thing and if so, what is driving that since there’s some consumer weakness in Europe, etc.?

Joel B. Ronkin

We have experienced robust growth in our travel/retail business and there are a number of drivers of growth. One is the expansion of airports particularly in Asia Pacific and those become prime destinations for consumers in those markets to buy products. We’ve also seen the expansion of the Heathrow Terminal 5 which has helped in a very strong travel/retail center. The travel/retail business throughout Europe actually is quite strong and the Middle East again becomes a strong market for travel/retail. So we’re very bullish about that channel of distribution as we move forward into 09 and actually have a number of initiatives to expand our growth and presence in that channel.

Gary Giblin - Goldsmith & Harris

Would those be new locations or different merchandising philosophies?

Joel B. Ronkin

It’s a combination of both. We see a very strong opportunity for the Juicy Couture business in that channel of distribution on a global basis and we also see expansion of our Prevage franchise in our Elizabeth Arden skin care franchise.

Gary Giblin - Goldsmith & Harris

Can you update on Prevage? I could have missed this because the overlap with the Este Lauder call but is Prevage on plan, above plan? Are you planning an extensive product family additions around the Prevage?

Joel B. Ronkin

Prevage for the year was up 15% on a global basis, much of that again coming from international and we actually are introducing a new Prevage body cream. We really listened to our consumers particularly on our website and this is a product that many consumers are requesting around the world so we are introducing it in October so that’ll help drive the Prevage business during fiscal 09.

Operator

There are no further questions.

E. Scott Beattie

Thank you very much everyone for joining us today.

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Source: Elizabeth Arden, Inc. F4Q08 (Qtr End 06/30/08) Earnings Call Transcript
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