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Edited Transcript of PERY earnings conference call or presentation 30-Aug-18 1:00pm GMT

Q2 2019 Perry Ellis International Inc Earnings Call

MIAMI Sep 7, 2018 (Thomson StreetEvents) -- Edited Transcript of Perry Ellis International Inc earnings conference call or presentation Thursday, August 30, 2018 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Jorge Narino

Perry Ellis International, Inc. - CFO

* Oscar Feldenkreis

Perry Ellis International, Inc. - CEO, President & Director

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Conference Call Participants

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* Gregory R. Pendy

Sidoti & Company, LLC - Research Analyst

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen, and welcome to the Perry Ellis International's Fiscal Year 2019 Second Quarter Results Conference Call. As a reminder, today's conference is being recorded.

Before we begin, I would like to remind you that some of the comments made on the call, either as part of the prepared remarks or in response to your questions, may contain forward-looking statements that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such information is subject to risks and uncertainties as described in the press release and in documents that we have filed with the SEC. Joining us today from this call from Perry Ellis are Oscar Feldenkreis, Chief Executive Officer and President; and Jorge Narino, Chief Financial Officer.

I would now like to turn the call over to Oscar Feldenkreis. Please go ahead, sir.

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Oscar Feldenkreis, Perry Ellis International, Inc. - CEO, President & Director [2]

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Good morning. Thank you for joining our earnings call for the second quarter of fiscal year 2019. Today, we are pleased to report that this is our fifth consecutive quarter of the year-on-year pretax earnings growth, and we will share some of the highlights of the company's performance for the quarter.

In the second quarter, total revenues decreased 3.5% below last year to $199 million. This decrease includes a loss of approximately $5 million of revenues earned from Bon-Ton in the same period last year and further decrease of approximately $3 million of revenues from the Laundry dresses, which now operates under a license model. After excluding these exceptional changes, revenues were relatively the same year-on-year for the same quarter.

We also took a very conservative approach in Q2 on the inventory availability due to the concerns regarding credit issues in the current environment. Notwithstanding this, we experienced strong favorable revenue performance for Original Penguin, up 20%; Europe, up 16%; and licensing, up 5%, including the reclass of $1.3 million of advertising contribution from licensees.

The strength of our product innovation and successful execution of our growth initiatives, focusing on generating higher margins and reducing direct-to-consumer promotional activity, continues to be effective, enabling the company to improve gross margin by 110 basis points versus the same quarter last year. Our core men's business in Golf, Original Penguin and Perry Ellis performed very well for the first half of the season, with higher AURs at retail. And we're starting the fall season with less clearance. The impact of the previously mentioned initiatives and our persistence focused on operating cost management generated an adjusted EPS of $0.16, which includes the exit of Bon-Ton, Laundry dresses moving to a licensed business model and a higher tax rate, driven by the reversal of our tax valuation alliance -- allowance.

Given the challenges in the retail environment, we remain strongly committed to ensuring that we hold the appropriate levels of quality inventory, while simultaneously looking out and positioning the company to take advantage of additional business opportunities. To this end, we believe that the inventory position has been managed effectively during the first half of the year from a starting value of $175 million and reducing to a balance of $135 million at the end of the quarter, which is marginally up $4 million compared to the same period last year.

The company's cash resources remain robust, ending the quarter at $21 million after redeeming $50 million of bonds in the first month of the quarter. The revolving credit facility at quarter end had a low balance of $7 million.

Now I will move on to some of our key performance highlights for the quarter as well as some of the initiatives that we believe will push the company forward into the coming months. Original Penguin performance in the second quarter was commendable, improving plus 20% compared to the same quarter last year. This was driven mostly by products of polos, T-shirts, shorts, combined with strong engagement within the e-commerce segment of our brick-and-mortar retail partners. The brand's performance in brick-and-mortar partner doors also showed favorable gains, which signaled a further door expansion going into the second half of the year.

Our core golf business was down by 5% as a total due to the lack of inventory, given the unseasonably cold weather in the first half. We adjusted our inventory receipts in the second quarter. Looking at brand performance, Callaway delivered a plus 24% increase in revenues, led by growth across all the channels. Jack Nicklaus was a star performer, showing growth of over 40% compared to last year. The PGA TOUR brand decreased during the quarter, but we believe that this reflected the high revenue growth realized in the first quarter as well as the Bon-Ton exit. In the second quarter, we also launched the Original Penguin Golf collection, which has shown very favorable responses with our first round of shipments.

Rafaella. We lost a major trading partner in Bon-Ton, which significantly impacted the company in the first quarter. We are pleased at the second quarter results, where Rafaella came in substantially equal to the same period last year. The knitwear category's strong consumer response to the fresh patterns, colorful prints and the focus on our casual weekend line helped to support the brand in the quarter.

Licensing. Our strategic goals and brand initiatives continue to be driven through licensing. We executed 4 new agreements in the second quarter of the year, all of which were in North America. And we plan to push for several more to be secured in North America and in Europe before the end of the fiscal year.

Original Penguin licensing revenues continued its double-digit growth, up 22% in the quarter compared with last year. The drivers for this growth are men's and boy's footwear in both domestic and international markets. Our continued introduction of product brand extensions and growth in the international markets also contributed to a strong quarter for the brand.

The European arm of the company performed exceptionally well in the quarter, growing plus 16% overall. Nike, Farah, Callaway continued to drive this market forward, while Original Penguin retail also produced favorable gains in the quarter.

We're also excited to announce the relaunch of Perry Ellis America. As part of our strategy to leverage the rich heritage of the brand, we are reaching into the archives to deliver the first of 5 limited-edition Perry Ellis America capsules, which will debut in October of this year. This will be pieces pulled straight from the '90s, encapsulating the bold colors and logos of the time. The campaign to support the capsules was developed in partnership with HYPEBEAST and some of the key retailers, which include MATCHESFASHION. COM, Bloomingdale's, hbx.com and Selfridges in the United Kingdom. We are thrilled with the level of interest we have already received and expect this to be a great halo to the brand in both the domestic and international arenas.

Our plans to expand Nike Swim globally are progressing well. During the quarter, revenues generated outside of the United States represented 22% of total revenues, nearly doubling in value from the same quarter last year. Europe is the main driver of this growth, coming from successful new wholesale partners.

Before I conclude, I would like to provide a brief update on the George Feldenkreis transaction. We are making important progress to close the transaction, including recently being granted early termination of the waiting period under HSR. The company remains committed to this transaction and is on track to close in the second half of this year.

Overall, we feel positive about the first half of the year. While we will continue to closely watch any upcoming issues regarding tariffs and general retail market, we believe the company's positioned well to navigate the challenging retail environment with our strong, diversified global brands.

Before I turn over the call to our CFO, I would like to remind everyone to please limit your questions to our earnings announcement. We're not able to respond to questions related to the proposed acquisition of the George Feldenkreis at this time. I would also like to take this opportunity to thank all Perry Ellis associates for their hard work and supporting this -- during this transition period.

With that, I'd like to turn over the call over to Jorge Narino to review our second quarter financials in more details.

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Jorge Narino, Perry Ellis International, Inc. - CFO [3]

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Good morning, everyone. Before I begin, I would like to take note that the results I will highlight with you on today's call are on a non-GAAP basis adjusted for cost to streamline and consolidate our operations as well as other strategic initiatives, including the board's review of strategic alternatives. We have provided reconciliation tables in the earnings release we issued this morning.

Now moving on to our results. The second quarter finished a strong first half for the company with positive comparable store sales and expansion in gross margin, which drove adjusted operating income and adjusted net income above the second quarter last year.

Our results are noteworthy as at the start of the year, we expected fiscal 2019 to see some top line headwinds given the Bon-Ton bankruptcy and the change in Laundry dresses to a licensing model. We also were impacted by the timing of licensing income due to revenue recognition accounting changes. Despite this, our company grew total sales by $3 million for the first half of the year, with core ongoing sales rising 3%. This includes strong performances from our core brands and a positive comp in our DTC channel. These strong results reflect the disciplined execution of our long-range strategy.

Let me share our performance in more detail. Consolidated revenues for the second quarter totaled $199 million and declined 3.5% on a GAAP basis from $207 million last year. This decline reflects the headwinds I just mentioned and a shift in deliveries favoring the first quarter. On a constant currency basis, revenues declined 3.8%. And further adjusting for business exits and the change in Laundry to a licensing model, revenues remain relatively consistent for the second quarter last year.

By segment. Revenue in our Men's Sportswear and Swim segments totaled $151 million as compared to $156 million prior year. The decline was driven by a shift in shipments favoring the first quarter. To put this in perspective, the first half shipments rose 3% in line with our expectations, driven by higher sales in Original Penguin, golf apparel and Nike Swim.

Revenue on our Women's Sportswear segment totaled $17 million as compared to $20 million in the prior year. While the women's business declined as expected, given the transition of Laundry dresses to a licensing business, we are pleased to see our Rafaella business in line with prior year despite the wind down of the Bon-Ton sales due to their bankruptcy. As mentioned previously, we expect the transition of Laundry dresses to our licensing partners to bring us savings in the second half of our fiscal year as we remove the costs associated with the business and begin to record more licensing revenue.

Direct-to-Consumer revenue totaled $21 million from $23 million in the prior year as positive comparable store sales were offset by store closures. Our comps rose nearly 7.3% for margin for the quarter, reflecting the strong consumer response to our product assortments. The 2 stores in Puerto Rico, that were closed due to the hurricane at the end of last year's third quarter, still have not reopened.

Licensing revenue rose 21% to $9.9 million as compared to $8.2 million in the prior year, reflecting the change of Laundry dresses to a licensing model and the growth in new licenses. Revenue includes a $1.3 million increase due to the adoption of the new revenue recognition standard, which requires advertising reimbursements to be classified as revenue instead as a reduction of related advertising costs as -- which was the case in fiscal 2018.

Moving on to total company results. Beginning with gross margins, adjusted margins expanded by 110 basis points versus prior year as a result of mix -- as we saw a greater mix of higher-margin licensing and value chain sales and a timing shift to higher-margin international sales. SG&A totaled $75.1 million for the quarter or 37.7% of total sales as compared to $68.4 million or 33.1% of total sales in the prior year second quarter. SG&A was approximately flat with the prior year, excluding costs to streamline operations and other strategic expenses. These costs, approximately $6.8 million, were primarily attributed to our board's exploration and evaluation of potential strategic alternatives and the related February 6, 2018, proposal by Mr. George Feldenkreis to acquire all of our outstanding common shares. We continue to maintain cost discipline, effectively managing increases in wages and other inflationary costs that have risen 3% to 4% per year.

Adjusted pretax income was $3.6 million, up from $3.2 million in the second quarter of fiscal 2018. Adjusted net income was $2.5 million, in line with last year's second quarter, and adjusted net income per diluted share was $0.16, matching last year's second quarter.

Turning to the balance sheet and cash flows. Our balance sheet continues to be very strong. Inventories grew 3% versus the second quarter of fiscal 2018, supporting the growth of Nike Swim, including the expansion of our international businesses. In essence, our inventory's back in line with last year, decreasing $40 million from prior year-end.

We continue with our strong cash flow generation in the quarter, with $31 million in operating cash flows and our net debt to total capitalization of 4.7%, primarily because of the redemption of the remaining $50 million notes payable during the second quarter. In addition, we reduced our borrowings under the credit facility from our first quarter by $55 million to $7 million at the end of the second quarter. This places us in a very comfortable position to support the expansion of our global businesses. In terms of guidance, lastly, as noted in our press release, due to the pending transaction with George Feldenkreis, we are not providing guidance.

In summary, we continue to be pleased with the performance of our brands and expect our favorable momentum to continue as we capitalize on the power of our global brands and strong sourcing and distribution infrastructures while maintaining discipline with regards to expense and inventory management. We remain confident we are making the right strategic decisions to position our company for long-term success.

Before I turn the call over to the operator, I would like to request those polling for questions to limit your questions to the company's performance, strategy and outlook. We are not able to respond to questions related to the board's acceptance of the go-private offer made on February 6.

With that, I will turn the call over to the operator for Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And we'll take our first question from Greg Pendy with Sidoti.

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Gregory R. Pendy, Sidoti & Company, LLC - Research Analyst [2]

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I just wanted to dig into the gross margins a little bit. You mentioned mix being a benefit and sort of reducing your DTC promotions. Can you just talk about the online efforts and kind of how that's going? Was that also a portion of the gross margin upside?

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Jorge Narino, Perry Ellis International, Inc. - CFO [3]

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Most of the gross margin upside was due to higher international sales that we had. We increased our international sales by about 10% in the second quarter, so that drove the line up. From a total DTC, we had higher margins related to less promotional season that we had from that perspective, so that grew our line. We didn't see it as much on the e-commerce side, though.

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Gregory R. Pendy, Sidoti & Company, LLC - Research Analyst [4]

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Okay. That's helpful. And then can you just talk about -- can you just talk about the transition and how we should think about the transition to a licensing model, just big picture, the hit on the revenue? And just what type of costs maybe come out of that?

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Jorge Narino, Perry Ellis International, Inc. - CFO [5]

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You broke up a little. Can you repeat the question?

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Gregory R. Pendy, Sidoti & Company, LLC - Research Analyst [6]

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I'm sorry. Can you just talk about the transition? And how we should think be thinking about the licensing transition just from a big-picture perspective? You mentioned some of the costs will be coming out of that. Obviously, it's a hit on the top line.

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Jorge Narino, Perry Ellis International, Inc. - CFO [7]

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It's a hit on the top line, and it's a hit to our gross margin as we replaced about $4 million of sales related to that -- I'm sorry, $4 million of margin. But overall, when we take out the business infrastructure that was necessary to generate those sales to the total bottom line on a fiscal year, we expect to have a $2 million savings when you take it all the way -- yes when you take it all the way down to the bottom line.

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Operator [8]

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And that will conclude today's question-and-answer session. At this time, I would like to turn the call back over to Oscar Feldenkreis with any additional or closing remarks.

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Oscar Feldenkreis, Perry Ellis International, Inc. - CEO, President & Director [9]

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Thank you all very much for listening and participating today, and have a beautiful Labor Day weekend filled with lots of sunshine. Take care. Bye-bye.

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Operator [10]

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And that will conclude today's call. We thank you for your participation.