Elizabeth Arden F1Q08 (Qtr End 9/30/07) Earnings Call Transcript

| About: Elizabeth Arden, (RDEN)
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ElizabethArden (NASDAQ:RDEN) F1Q08Earnings Call November 2, 2007 9:30 AM ET


AllisonMalkin – Investor Relations

ScottBeattie – Chairman, President and Chief Executive Officer

StephenSmith - Executive Vice President and Chief Financial Officer

JoelRonkin – Executive Vice President and Manager, North America Fragrances

MarceyBecker – Senior Vice President, Finance, Treasurer and Corporate Development


KathyReed - Stanford Eagle

BillChappell – SunTrust Robinson Humphrey

JoeAltobello - CIBC World Markets

RezaVahabzadeh - Lehman Brothers

RommelDionisio - Wedbush Morgan Securities Inc

MikeMarinucci - Wagner


Iwould like to welcome everyone to the Elizabeth Arden Conference Call. (Operator Instructions) It is now my pleasureto turn the floor over to your host, Allison Malkin.

Allison Malkin

Thankyou for joining us. Before we begin, if you have not received a copy ofElizabeth Arden’s press release, please call 203-682-8200 and we will send oneout immediately. Also please note that this call is being broadcast live overthe Internet and you can access the call at www.elizabetharden.com.

Beforewe begin I would like to remind you that some of the comments made on this callas either prepared remarks or in response to your questions may containforward-looking statements that are made pursuant to the Safe Harbor Provisionsin the Securities Litigation Reform Act of 1995.

Suchinformation is subject to risks and uncertainties that could cause actualresults to differ materially from the statements as described in the pressrelease and in Elizabeth Arden’s most recent annual report on Form 10-K filedwith the SEC. We direct all listeners to that report.

Theinformation contained in this call is accurate only as of the date discussedand investors should not assume that the statements made in this call remainoperative at a later time. Finally, Elizabeth Arden undertakes no obligation toupdate any information discussed on this call.

Iwould now like to turn the call over to Scott Beattie, Chairman and CEO ofElizabeth Arden.

Scott Beattie

Thanksvery much, Allison and welcome everyone to our first quarter conference call.Joining me today is Steve Smith, our Executive VP and Chief Financial Officer;Joel Ronkin, our Executive VP of our North American Fragrance Division; andMarcey Becker, our Senior Vice President of Finance.

Beforewe start, I will just provide a brief overview of the content today. First ofall I will provide an overview of our first quarter corporate performance andoutlook for the second quarter. I will provide also a summary of theinternational business and our Elizabeth Arden Prestige North Americanbusiness. Joel will then go into an overview of our North American Fragrancebusiness, as well as a performance review of our new fragrance innovation andlaunches. And Steve will provide a review of our key financial metrics duringthe first quarter. At the end of the three segments we’ll be happy to answerany questions.

Interms of the first quarter performance, as you can see from the press release,we are very pleased with the overall performance of our business. In fact, Ithink the business actually performed better than the numbers show.

Aswe stated in the press release and previously outlined in our guidance, we hadbudgeted and planned down our North American department store business. Thisdecline was a function of both the anniversary of last year’s fragrancelaunches; some movement in the Elizabeth Arden department store calendar, both interms of the retail calendar and the GWP program, as well as not anniversaryingthe new PREVAGE innovation during the first quarter.

Muchof the reduction in our North American department store performance will bemade up during the second quarter as we had budgeted and planned and we will gointo that in a second in more detail.

Interms of our overall performance, our International business was upapproximately 18% during the first quarter. Most markets had positiveincreases. In addition, the profitability, most notably in our Europeanbusiness, improved quite significantly. By brand, our fragrance sales were up29% or by segment of business, our fragrance sales were up 29% and ourElizabeth Arden brand business was up 14%.

Specificallyin Europe, our overall business was up 14%. The Europe domestic markets, which as we stated in our previous conferencecall, we went through a restructuring last year. For the last 3 quarters theyhave shown steady solid increases over budget both from a sales point-of-viewand profit point-of-view. Europe domestic markets were up 35% for the firstquarter and we had good growth across most of the markets led by both theincreased fragrance sales and increased performance of our key accounts likeSephora, Marionnaud and Douglas. So we were very pleased with that.

Interms of our Travel Retail business, it was up 19%. There were increases in allthe markets across all categories. The Elizabeth Arden branded products andskin care color and PREVAGE and fragrances was up 22%. That was led by thePREVAGE business, which was up almost 30%. Fragrances also had a double-digitgrowth of 13% due to the launch of Mediterraneanduring the first quarter in Travel Retail. And so we were extremely pleasedwith the performance of that business.

Interms of Asia-Pacific, which also includes our South African business andAustralia-New Zealand, the business was up 21%. All markets were up across thewhole region with the exception of Korea. Australia was very strong, particularly with the new launchof Mariah Carey as well as our Mediterranean launch, and the PREVAGE businessis also very strong.

Interms of China, our business in Mainland China was up 75%, which is over what we had budgetedfor. Taiwan business was up 24% and overall in the region wesaw very solid growth. We’re seeing extremely solid improvements inproductivity per door. We’re also seeing rollout in both the regional airportsas well as additional distribution in traditional department stores both in Taiwan and China.

Themost interesting thing about our greater China business is, we’re attracting amuch younger customer to our counters in those markets and particularly withour new whitening products and our Intervene products, so that’s veryencouraging.

Thelast piece of our international business is what we call the distributorbusiness, and those are the markets in which we don’t have captive affiliates,but we use local distributors or partners in those markets to sell ourproducts, and that business is up 40% in the first quarter year-over-year.

Wesaw strong growth in Japan and Latin America,the Ukraine, Middle East and India. Our business in India, we’re ranked number 3 in India, it’s still a very small market but growing.We’re very well positioned to continue to grow in that prestige segment of themarket in India, although it will be somewhat slower than thegrowth of our China business, it also has a very strong fragrancemarket, and we’re also capturing some additional growth with our fragrancebusiness.

Interms of the operating expenses, SG&A and EBITDA, I’ll leave that to Steveto provide more detail.

Iwould also like to just comment briefly on our corporate initiative. As weoutlined in our last conference call, we continue to see benefits from ourre-engineering of our extended supply chain project, which we are in the midstof implementing many of the recommendations we identified in late fiscal ‘07.We are working hand-in-hand with external consultants to help us do that. We’veseen improvement in our account management and sales and ops planningprocesses. We’ve seen improvements in our strategic purchasing organization andwe will see improvements in gross margin and cost of goods as we roll out intolatter ‘08 and into ‘09. We are continuing to see improvement in our globallogistics infrastructure.

Allof these initiatives, including the initiatives to improve not only ourextended supply chain, but our allocation of capital across our brandportfolio, are focused on maximizing our return on invested capital and movingourselves up to our targeted 10.5% EBITDA margin and we’re very comfortablethat we will obtain that this year.

Onelast comment before I introduce Joel, I would just like to announce as wellthat we’ve signed a licensing agreement with the Rocawear Apparel Company tolaunch fragrance, skin care and cosmetics. A full press release will be issuedon this on Monday in partnership with the Iconix Group.

Iconixhad purchased the Rocawear brand in the spring of ‘07. As many of you know, wehave been in partnership with Iconix, and are very impressed by their businessmodel and their capability at building brand. We are in partnership with theBadgley Mischka brand and we look forward to the launch of the Rocawear fragrancebrand during fiscal ‘09.

Onthat note, I’d like to hand it over to Joel Ronkin to discuss the NorthAmerican fragrance business.

Joel Ronkin

Thankyou, Scott. I’m going to provide, as usual, an overview of the performance ofour North American Fragrance group, as well as discuss our new launches, andI’ll briefly give a preview of Christmas.

OurNorth American Fragrances group, as you recall, represents approximately 60% ofour overall sales for the company; includes our department store business inthe US and our mass business in the US, our e-Commerce business, and our business in Canada and in Puerto Rico.

Weexperienced net sales growth for the quarter of 7%, with solid growth in ourmass business, which was somewhat offset by a budgeting decline in ourdepartment store group, which Scott referenced earlier.

Netsales in our mass group increased by 14%. Last year we acquired the SovereignSales business mid-quarter, and as a result, we got some benefit this quarter,but it was on top of a big quarter last year in the first quarter as well, abig increase.

Newlaunches that significantly contributed to the net sales growth in mass: Duringthis quarter, we shipped Hillary Duff and Danielle Steele to mass, as well as anumber of new distributor brands to our mass accounts. I think I mentioned lastcall there really was an unprecedented pipeline of new brands going into mass.

Butinterestingly, the brand, which has significantly outperformed our plan, insome cases by more than 200%, is Danielle Steele. We repositioned this brandthis spring with new visuals and added value, and after somewhat of adisappointing launch of Prestige, and it really has turned around. We’re alsopleased that our Hillary Duff brand is performing well at mass.

OurPrestige departments or business declined about 19% in net sales during Q1,which was consistent with our plan, and this largely was due to a change in ourlaunch strategy, as well as timing of launch shipments, as well as there was achange in the Prestige retailers’ calendars, which moved things back a week ina number of cases, and that negatively impacted our year-over-year comparisons.

Nowas Marcey has mentioned before, we manage our business, and our first half inparticular, together, and it’s very, very difficult, if not impossible, toprecisely estimate whether a holiday shipment is going to happen in Q1 or Q2,and that includes our new launches as well.

Oneof our most significant new launches is the Mariah Carey fragrance, M by MariahCarey. And that began shipping to Prestige department stores around the worldin mid-August and September. It’s important to remember that this is a globalcoordinated rollout, the first time in a long time that we’ve launched a brand globallyat the same time. And the timing and manner of the way we spend our money andthe account distribution strategy is managed in that approach.

Infact, about two-thirds of our sales will come from outside the US on this brand at the other international Prestigeaccounts. So therefore, we caution you just a little bit at looking just at NPDdata and trying to determine how a launch is doing, and even in the United States, only 70% of our Prestige shipments are coveredby NPD because a number of our Prestige accounts do not report to NPD. I justwant to also mention on Mariah that globally we achieved our brand plan for Q1.

NowMariah herself is popular. Last week we had a personal appearance event atMacy’s Herald Square,which just went very, very well. We had people sleeping on the sidewalkovernight waiting for just the opportunity to participate in the event, and itliterally shut down Macy’s Herald Square. Macy’s had told us it’s the largest personalappearance they’ve ever had.

We’realso were lucky; that day and the day before she made many guest appearances,including on the Today’s Show, BET’s 106 & Park, as well as The View, andcreated over 25 million impressions and included spots on MTV, TRL, E!, Extra,Access Hollywood, virtually everybody, and on the web it’s really been coveredeverywhere.

Wealso just started airing the TV commercial although you’ll see that principallywe’ll air that commercial during Christmas time where most of the holidayshipments obviously occur. And so we’re very pleased, and as a result of allthis activity, we see that there’s real retail sales momentum behind this brandand it’s starting to accelerate and really well timed for the holiday season.

Overall,the sales of the Britney Spears fragrances remain on plan this year withapproximately 50% of our sales occurring outside the US. So far, and this is always the question we get,we are seeing little to no impact to the performance of her fragrance brand atretailers due to all of the negative publicity she has received regarding herpersonal life. Probably you have all taken notice that her new album “Blackout”is receiving great accolades and is on its way to becoming the number one albumin the US. Her first single from that album, “Gimme More,”achieved the number one downloaded song in just three days of its release oniTunes. It’s still a top ten song. It’s the number one song on Yahoo! Music;number three on Billboard Hot 100. So the point is her career and her music andher fragrances are far from dead; and in fact, they’re very healthy. The songwas also number one on a number of charts around the world including in the UK. So this is really a global phenomenon.

Wementioned before that we were going to launch, and we have launched BritneySpears Believe in late September and early October to US department stores.While we exceeded our targets for shipments in the first quarter, we’re reallyjust now starting to see our retail sales on the brands, so it’s really tooearly to comment on retail sales.

Wealso are, for the first time, introducing a Britney Spears Fantasy set, holidayset for the mass account this holiday season, and that should help us as wellwith our rankings on Fantasy. Fantasyand Curious both remain top ten brands at retail and the mass category here inthe US.

Nowoverall, as far as the holiday season, it’s obviously a busy time. We will saythat we stand cautiously optimistic. We feel we’re very well-positioned in bothour mass and Prestige businesses with our new launches, our value on ourexisting brands, and just an unprecedented number of new distributor brandsthat are very high ranking into our US mass accounts.

We’vegot a very extensive media schedule planned, which encompasses our new brandsas well as a significant reinvestment behind our core brands, including WhiteDiamonds and Red Door. In fact, in the case of White Diamonds, our media spendis going to be up 50% and that was already a very big number, and it’s largelyTV.

We’reembarking for the first time in many years on a print campaign for Red Door,which is still a very important brand to us and has very high rankings. We’rerunning significant TV campaigns for the Britney brands. We’re going to have TVfor our Provocative Woman, which is the brand that features CatherineZeta-Jones. Also With Love, Hilary Duffis going to have a strong TV campaign and then a print campaign for DanielleSteele.

Asfar as retail sales, what we’re seeing is that at mass the category hasflattened out somewhat and it’s really a mixed bag. We see an uneven trendwith, I would say, our chain drug accounts being more to the positive side andsome of our mass volume retailers showing somewhat of a bit of a negative trendand we’ll continue to watch that.

Ofcourse over the past several quarters our market share has really risen in themass business and we’ve been the beneficiary of that; I think our market sharenow has risen from about a year ago at 45% to about 60% now, so we feel likewe’re very well positioned to take advantage of what we hope to be a verystrong holiday season.

Sowith that, I will turn it over to Steve Smith.

Stephen Smith

Thankyou, Joel. Gross margin for the quarter was 39.1%, which was up 20 basis pointsfrom the prior year. Higher percentage of distributor brands, 25% versus 22%the prior year, which negatively impacts gross margin, was more than offset byour lower supply chain costs this year, primarily as a result of theacquisition-related expenses we incurred last year.

Forthe quarter, our SG&A expenses increased by 6% over flat as a percentage ofsales. Advertising promotion expenses increased by 8% or slightly higher as apercentage of sales while our G&A costs declined as a percentage of sales.Our tax rate was 24.9%.

Duringthe quarter we also incurred $950,000 in restructuring charges. These chargesimpacted EPS by $0.03 a share. We are continually evaluating ways to reduce ourindirect cost structure by being more efficient and thereby increasing ouroperating margins. These particular severance costs relate to some finalportions of our European restructuring project and the streamlining of ourlogistics management structure in the United States.

Ourrestructurings in Europe are substantially complete based on current plansand we do not expect further significant charges in Europe. We finished the quarter with $223 million outstanding on our creditfacility. Net of cash, the balance was $196 million compared to $185 millionfrom the prior year. We have peaked on our credit facility and our peak wasabout $10 million lower than last year.

DSOat 87 days compared to 96 days in the prior year and we compute that on a rolling12-month basis. Cash flow used in operations was $116 million as compared to$82 million in the prior year. That amount did not reflect beyond the $68million of inventory that we financed through the Sovereign acquisition lastyear. Additionally, if you recall from last year, it took some time to get the Riviera products fully ramped up for production due tosupplier issues.

Intotal, inventory was up some $64 million versus the prior year of Q2. 40% ofthe increase is due to increased investment in distributor brands, due toinnovation and new relationships. And our cost basis in this inventory is some3 to 4 times over our owned brand portfolio on a unit basis. 20% of theincrease is due to the Riviera inventory situation and 40% is due to increases in new innovationactivity for our owned brand portfolio, which was also exacerbated by the shiftin the US department store retail calendar, which shifted aweek of shipments into October.

Additionally,from a supply chain perspective, it is at times more efficient to do ourpromotional set runs once while the shipments could occur at multiple waves. Weare encouraged by the results of our supply chain and logistics initiatives todate and believe these initiatives will lead to positive cash flow generationfrom inventory this year.

Capitalexpenditures were $7.2 million in the quarter, and in addition, during thequarter, we paid the first installment of contingent consideration of $6.3million on the Sovereign acquisition. Currency did favorably impact sales forthe quarters compared to expectations, although with our hedging program inplace, we are capped on some of that upside. At current rates, potential fullyear benefit is included in the range of annual guidance provided. Given therecent volatility of certain currencies and questions as to whether currentrates will be sustained, we are not changing our sales estimates at this time.

Itis important to note that our first quarter is not significant related to ourfull-year guidance. We do not manage our business on a quarterly basis but overplanning horizons that are longer. And with that, I will turn it back to Scott.

Scott Beattie

Thanksvery much, Steve. Operator, we would by happy to open up the lines forquestions right now.

Question-and-Answer Session


Ourfirst question comes from Kathleen Reed – Stanford Eagle.

Kathy Reed – Stanford Eagle

Goodmorning. First of all, can you just talk a little bit about SG&A spendingin the quarter, if there is going to be a shift into the second quarter? Ithink in your prior guidance you were expecting it to be up 150 basis pointsyear-over-year as a percent of sales and it was actually down slightly, so arewe going to just see higher TV spending - and you commented a lot about allyour media plans in the second quarter.

Scott Beattie

Yes,I wouldn’t read too much into that. As Steve just mentioned, we really managethe business on the two 6-month segments, the first and second quarter becauseof the split here in October, it’s difficult to manage specifically thecalendar of shipments as well as of spend.

Ithink we’re very confident of our numbers for the first half, and we’veobviously had a very strong first quarter, and as Joel went through, we have avery aggressive spend against not only our new launches and innovation but alsoour existing brand portfolio.

Inaddition to that, as I tried to state in going through the details of ourinternational business, we’ve got great momentum in our international business.Our Elizabeth Arden brand, which many people don’t realize, 65% of that volumeis in the international markets, and the Elizabeth Arden brand is growing veryrapidly across all of our segments of our international business, including thePREVAGE brand. And so, combined with the strong currencies in those markets,are providing a good, solid strength to our overall business.

Kathy Reed - Stanford Eagle

Butjust to clarify, it sounds like if anything, you’re actually increasing orspending; you didn’t pull back on any of your spending for the first half?

Scott Beattie


Kathy Reed - Stanford Eagle

Andsecondly, just I guess a quick question on your first-half sales guidance,because it really sounds like you had a lot of positive momentum like you justdiscussed in international and it sounds like you’re even getting some newdistributed brands, which maybe you can comment on for mass.

AndI just wondered why then you just slightly adjusted your sales guidance for thefirst half from 6 to 7 to 5 to 7, because if you hit that 5 it would imply kindof like only a 4% growth in the second quarter. So is that just really due tomore conservative outlook for Christmas, or is there one thing that you’reparticularly cautious on?

Scott Beattie

Ithink that guidance there is really to be just slightly more conservative inour US business. Our international business, as you say,has a number of growth drivers, both across its fragrance portfolio, as well asthe Arden brand and PREVAGE, and we’re very confident ofthat. But in the US, we’re in a position here that with high gas prices and the creditissues that we have and so on, just being a little bit more conservative.

Wedon’t see anything right now in any of our customers or with any of ourspecific programs, including our new launches, that would give us concern, butyou look across all of our customers and their guidance into the secondquarter, or what is the fourth quarter in terms of the calendar year, and theyare being conservative.

Ithink the other thing that we need to focus on here is what Joel mentioned, isour increased market share. Even though some of our mass retailers and some ofour department stores are having difficult comps, we are seeing tremendousgrowth in our market share, and that’s a result of new innovation, new brands,as well as new launches of fragrance brands for us, and a very active calendarof innovation for the Elizabeth Arden brand.

Whatwe see gives us confidence in our outlook, is the confidence in our innovationpipeline, as well as our increased market share and performance.

Kathy Reed - Stanford Eagle

Justlastly, can you quantify what your department stores would have been down ifyou didn’t have the one-week shift in the calendar?

Scott Beattie

Wetry to do that and it’s very difficult. We figured that our best estimate onthat is it’s not just the calendar, but as I mentioned, we had a change in ourMacy’s GWP date, as well as some innovation for PREVAGE and Ceramide color thatwas in the first quarter last year, which weren’t anniversaried.

Infact, we’ve got a new PREVAGE night cream coming out in the second quarter, andwe’ll get the benefit and the pickup of some of the things that we missed inthe first quarter in the second quarter this year. So, there’s a lot of movingvariables here. I would say that the calendar probably represented about 25 or30% of the total shortfall.

Kathy Reed – Stanford Eagle

Isthere any way to give that on a dollar basis, or no?

Scott Beattie

No,I don’t think we have that number handy here.


Yournext question comes from Bill Chappell – SunTrust Robinson Humphrey.

Bill Chappell - SunTrust RobinsonHumphrey

Goodmorning. Just wondered if you, just on a housekeeping basis, do you happen tohave for the quarter percentage of sales, mass department store andinternational? And then also what percentage was your brands versus third-partybrands?

Scott Beattie

Ourinternational business is about 40% of our total business, and the 60%remaining in our North American business, about half of that is mass and theother component is Prestige.

Bill Chappell - SunTrust RobinsonHumphrey

Andthen if you look at the restructuring charges, maybe can you tell us what youare expecting for total charges for the full year and then when you look at thesynergies, supply chain initiatives, when do you expect to see the majority ofthe benefits? Will we see that next quarter or is it more third- fourth quarteras we move into ‘09?

Scott Beattie

No,what we talked about in our year-end conference call in August, Bill, is thatthe initiatives that we are implementing here, we have got de minimiscontribution from the extended supply chain reengineering project this fiscalyear. The majority of those benefits will come in ‘09 and ‘10.

Andin terms of the restructuring charge, Steve and his organization, as well asthe integration of our corporate initiatives that we have identified, includingthe extended supply chain, are continually reviewing ways to streamline ourindirect overhead expense and drive our EBITDA and return on invested capital.

Wedon’t have any specific restructuring charges identified for the remainder ofthe year, but as part of the extended supply chain reengineering or any of ourother corporate initiatives, we see an opportunity to drive that EBITDA andreturn on invested capital. That is our singular focus.

Bill Chappell - SunTrust RobinsonHumphrey

Ijust want to make sure, so you are saying getting back to kind of 10.5% EBITDAmargin is less because of the initiatives this year, but more just siphoningthrough the acquisitions and seeing synergies from that, as well as mix andjust the overall improvement in the business?

Scott Beattie



Ournext question comes from Joe Altobello - CIBC World Markets.

Joe Altobello - CIBC World Markets

Firstquestion, just wanted to follow-up on Bill’s question on the EBITDA margintarget. It looks like if you guys do do 10.5 this year, you’re probably lookingat EPS north of $1.80 and I’m curious if as you said, Scott, earlier, thatyou’re pretty comfortable with that, why you’re not there in terms of guidance?

Scott Beattie

Well,I think it’s prudent and conservative of us, given the size of our secondquarter. And it’s again, Steve mentioned, we really manage our business with Q1and Q2 as one integrated unit, and it’s really our fall launch and holidayseason execution. I think we are very confident, we’ve got great momentumagainst our business. It is an uncertain world out there at the moment, and ithas been in a number of years since the beginning of this business.

We’reseeing some strong indications of our programs for Christmas, and we got a goodsell-through even though it’s very, very early days, but I think if we were toreadjust guidance, we would do it at the end of our second quarter conferencecall, and we’ll see how everything unfolds through Christmas. By the time we’refinished with second quarter, we’ll have a very clear idea of the third andfourth quarter.

Joe Altobello - CIBC World Markets

Interms of M – it’s still pretty early here, but how does that launch at thispoint compare to Curious?

Scott Beattie

Well,Curious was a unique event. Curious was a very, very successful celebrityfragrance launch. There wasn’t as much competition, Britney was at the heightof her career; it really redefined the celebrity fragrance launch. So, we’renot benchmarking the success of Mariah against the Curious launch.

AsJoel mentioned, we’re very excited about the Mariah Carey launch. She isincredibly enthusiastic and effective at supporting the launch. We’ve got greatresults internationally as well as momentum domestically here. Most of our PRand advertising support, as Joel mentioned, is just now hitting. She’s got anincredibly loyal customer base that we’re seeing around the world, so wehaven’t budgeted it at the level of Curious, but based on what we see now, weexpect it to be very successful.

Joe Altobello - CIBC World Markets

Mis a global launch; Curious I think was a North America launch initially?

Scott Beattie


Joe Altobello - CIBC World Markets

Andthen lastly on the gross margin side, obviously it’s only one quarter, I’m notgoing to really focus on this, but the gross margin is a little bit below theguidance you had laid out coming into this quarter, I was curious what wasgoing on there?

Steve Smith

Theguidance we gave for the quarter was 25 to 75 basis points, we’re at 20 basispoints.

Joe Altobello - CIBC World Markets

Right,it was sort of at the low end, that’s why I was just asking.

Scott Beattie

Atthe end of the day, again, as we’ve said a number of times, we don’t reallymanage specifically on a blended gross margin because we have a combination ofowned and distributed brands. As Steve mentioned earlier, we have a largerpercentage of distributed brands this first quarter versus last year firstquarter as a result of new innovation from some of our beauty partners thatwe’re shifting into mass retail in the United States.

Sothat mix of between owned and distributed can affect that gross margin number.We really focus on gross margin per brand as opposed to a blended gross margin.I think as we get through the second quarter we’ll continue to see improvementin gross margin as a result of the reduction in some of those supply chaincosts that Steve mentioned earlier.


Ournext question comes from Reza Vahabzadeh - Lehman Brothers.

Reza Vahabzadeh - Lehman Brothers

Ihad a question for Steve. You mentioned inventory should be a source of cashthis year. Can you comment on total working capital and how that could shakeout as either source or use of cash for the year?

Scott Beattie

Well,we’ve provided guidance of operating cash flow in approximately the $80 millionrange for the year. So you can kind of back into the guidance based on ourEBITDA targets and our capital expenditure number of approximately $25 million.

Reza Vahabzadeh - Lehman Brothers

Isthe CapEx number that you suggested, is that a normalized CapEx number or isthat a little higher this year than other years?

Scott Beattie

No,it’s normalized. We, for the last several years, have been in and around that$25 million number. That consists primarily of tools and dies for newinnovation and new products. It consists of in-store counters, primarily ininternational, but throughout our organization for the Arden brand and for PREVAGE and fixturing and so on,and IT-type investments, desktop computers and so on.


Ournext question comes from Rommel Dionisio - Wedbush Morgan Securities Inc.

Rommel Dionisio - Wedbush MorganSecurities Inc

Iknow the press release will come out in a few days but I just want to inquireabout the Rocawear brand? First of all, congratulations on that contract win.Is that going to be a men’s or women’s fragrance, or both, just because I thinkthe apparel is both men’s and women’s? And also what is the approximate timingof when a new product rollout would occur in calendar ‘08 I guess?

Scott Beattie

Yes,it is going to be both a men’s and women’s brands and it would be next fall.That is the plan.

Rommel Dionisio - Wedbush MorganSecurities Inc.

Alsoone last question on that, I think if I remember correctly, Jay-Z is thefounder/developer of that brand? Would you have him available for thecommercials or appearances or just as you have sort of marketed some of thesecelebrity brands in the past?

Scott Beattie

Hewill be very creatively involved in working with us and supporting that. He isreally the vision behind the brands and has already begun with us. So he willbe very involved.


Ournext question comes from Mike Marinucci - Wagner.

Mike Marinucci - Wagner

Ijust wondered if you had a couple of numbers for me that weren’t in therelease. The trade payables number at September 30, and then the breakdown ofthe inventory between raw material with finished goods? Do you have that?

Scott Beattie

Yes,the trade payable number was $182 million.

Steve Smith

Wedon’t break down the inventory between WIPs and componentry.

Scott Beattie

Itis not a significant part of the overall inventory balance, maybe 15, 20%.

Mike Marinucci - Wagner

Youbreak it out in the Qs. Am I going to need to wait for the Q, is that what youare trying to say?

Scott Beattie

Thecomponentry is 15, 20%.

Mike Marinucci - Wagner

Andthen just so I understand you had the Sovereign acquisition for half of thequarter last year, so what was the contribution on a percentage basis for thetotal sales gain for this quarter? Was it something in the neighborhood of 3%?

Scott Beattie

Ithink we addressed that; it is almost impossible to break out Sovereignseparately because a lot of the brands are shared brands. So it is hard to saywhat is from Sovereign and what is not. So we don’t break it out separately butit was a combination of the increase from Sovereign but a lot of new brandsthat we had coming into the mass channel had nothing to do with the Sovereignacquisition, so it was a combination of both.


Atthis time, there appear to be no further questions.

Scott Beattie

Thankyou very much, operator. Appreciate everyone joining us for the conferencecall.

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