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| PERY > SEC Filings for PERY > Form 10-Q on 8-Dec-2008 | All Recent SEC Filings |
8-Dec-2008
Quarterly Report
Unless the context otherwise requires, all references to "Perry Ellis," the "Company," "we," "us" or "our" include Perry Ellis International, Inc. and its subsidiaries. This management's discussion and analysis should be read in conjunction with our Annual Report on Form 10-K for the year ended January 31, 2008.
Forward-Looking Statements
We caution readers that this report includes "forward-looking statements" as that term is used in the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based on current expectations rather than historical facts and they are indicated by words or phrases such as "anticipate," "could," "may," "might," "potential," "predict," "should," "estimate," "expect," "project," "believe," "intend," "plan," "envision," "continue," target," "contemplate," or "will" and similar words or phrases or corporate terminology. We have based such forward-looking statements on our current expectations, assumptions, estimates and projections. While we believe these expectations, assumptions, estimates and projections are reasonable, such forward-looking statements are only predictions and involve known and unknown risks and uncertainties and other factors that may cause actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements, many of which are beyond our control.
Some of the factors that could affect our financial performance, cause actual results to differ from our estimates, or underlie such forward-looking statements, are set forth in various places in this report. These factors include, but are not limited to:
• general economic conditions,
• a significant decrease in business from or loss of any of our major customers or programs,
• anticipated and unanticipated trends and conditions in our industry, including the impact of recent or future retail and wholesale consolidation,
• the effectiveness of our planned advertising, marketing and promotional campaigns,
• our ability to contain costs,
• disruptions in the supply chain,
• our future capital needs and our ability to obtain financing,
• our ability to integrate acquired businesses, trademarks, tradenames and licenses,
• our ability to predict consumer preferences and changes in fashion trends and consumer acceptance of both new designs and newly introduced products,
• the termination or non-renewal of any material license agreements to which we are a party,
• changes in the costs of raw materials, labor and advertising,
• our ability to carry out growth strategies including expansion in international and direct to consumer retail markets,
• the level of consumer spending for apparel and other merchandise,
• exposure to foreign currency risk and interest rate risk,
• possible disruption in commercial activities due to terrorist activity and armed conflict, and
• other factors set forth in this report and in our other Securities and Exchange Commission ("SEC") filings.
You are cautioned not to place undue reliance on these forward-looking statements, which are valid only as of the date they were made. We undertake no obligation to update or revise any forward-looking statements to reflect new information or the occurrence of unanticipated events or otherwise.
Critical Accounting Policies
Included in the footnotes to the consolidated financial statements in our Annual Report on Form 10-K for the year ended January 31, 2008 is a summary of all significant accounting policies used in the preparation of our consolidated financial statements. We follow the accounting methods and practices as required by accounting principles generally accepted in the United States of America ("GAAP"). In particular, our critical accounting policies and areas we use judgment are in the areas of revenue recognition, the estimated collectability of accounts receivable, the recoverability of obsolete or overstocked inventory, the impairment of long-lived assets that are our trademarks, the recoverability of deferred tax assets, the measurement of retirement related benefits and stock-based compensation. We believe that there have been no significant changes to our critical accounting policies during the three and nine months ended October 31, 2008, as compared to those we disclosed in Management's Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended January 31, 2008.
Results of Operations
The following is a discussion of the results of operations for the three and nine months periods of the fiscal year ending January 31, 2009 ("fiscal 2009") compared with the three and nine months periods of the fiscal year ended January 31, 2008 ("fiscal 2008").
Results of Operations-three and nine months ended October 31, 2008 compared to three and nine months ended October 31, 2007.
Net sales. Net sales for the three months ended October 31, 2008 were $216.2 million, a decrease of $4.7 million, or 2.1%, from $220.9 million for the three months ended October 31, 2007. This decrease was primarily driven by an increase in sales allowances of approximately $4.0 million, a revenue decline of $4.5 million related to the effect of Chapter 11 filings or liquidations from multiple customers, the reduction of our private label bottoms business, and the reduction of certain brands in our specialty store channels; partially offset by organic growth of several of our platforms- Perry Ellis Collection, swim, golf lifestyle, denim, and Hispanic lines. Additionally, net sales for the third quarter of fiscal 2009 included approximately $5.7 million due to the acquisition of the C&C California and Laundry by Shelli Segal brands during the first quarter of fiscal 2009.
Net sales for the nine months ended October 31, 2008 were $641.4 million, an increase of $9.0 million, or 1.4%, from $632.4 million for the nine months ended October 31, 2007. This increase was primarily driven by several of our growth platforms- Perry Ellis Collection, swim, golf lifestyle, denim, and Hispanic lines. Additionally, net sales for the first nine months of fiscal 2009 included approximately $22.4 million due to the acquisition of the C&C California and Laundry by Shelli Segal brands during the first quarter of fiscal 2009. The increase was partially offset by a planned reduction of $26.0 million in our bottoms private label and replenishment business and the third quarter factors described above.
Royalty income. Royalty income was $6.6 million for the three months ended October 31, 2008 and 2007. Royalty income for the nine months ended October 31, 2008 was $18.7 million, a decrease of $0.4 million, or 2.1%, from $19.1 million for the nine months ended October 31, 2007. The decrease was due primarily to the termination of the Gotcha license in Europe offset by the benefit of new licenses added in the categories of outerwear, fragrances, and dress shirts.
Gross profit. Gross profit was $75.9 million for the three months ended October 31, 2008, a decrease of $1.0 million, or 1.3%, from $76.9 million for the three months ended October 31, 2007. Gross profit was $222.7 million for the nine months ended October 31, 2008, as compared to $216.4 million for nine months ended October 31, 2007, an increase of 2.9%.
As a percentage of total revenue, gross profit margins were 34.1% for the three months ended October 31, 2008, as compared to 33.8% for the three months ended October 31, 2007, an increase of 25 basis points. The improvement in the gross profit percentage was positively impacted by the reduction of the bottom's private label replenishment programs, improved wholesale margins due to increases in our branded businesses, and the addition of the C&C California and Laundry by Shelli Segal brands. As a percentage of total revenue, gross profit margins were 33.7% for the nine months ended October 31, 2008, as compared to 33.2% for the nine months ended October 31, 2007, an increase of 52 basis points. The improvement in the gross profit percentage came from the factors described above.
Wholesale gross profit margins (which exclude the impact of royalty income) increased to 32.1% for the three months ended October 31, 2008 from 31.8% for the three months ended October 31, 2007. The wholesale gross profit margin percentage increased for the nine months ended October 31, 2008, to 31.8%, as compared to 31.2% for the nine months ended October 31, 2007. These improvements are primarily attributable to the positive impact of the reduction of the bottom's private label replenishment programs, improved wholesale margins due to increases in our branded businesses, and the addition of the C&C California and Laundry by Shelli Segal brands.
Selling, general and administrative expenses. Selling, general and administrative expenses for the three months ended October 31, 2008 was $59.9 million, an increase of $3.8 million, or 6.8%, from $56.1 million for the three months ended October 31, 2007. As a percentage of total revenues, selling, general and administrative expenses were 26.9% for the three months ended October 31, 2008, as compared to 24.7% for the three months ended October 31, 2007. The increase in selling, general and administrative expenses, on a dollar and percentage basis, is attributed to additional costs related to our continued investment into the retail businesses, as well as certain costs associated with the expansion of the women's contemporary business.
Selling, general and administrative expenses for the nine months ended October 31, 2008, were $182.5 million, an increase of $18.4 million, or 11.2%, from $164.1 million for the nine months ended October 31, 2007. As a percentage of total revenues, selling, general and administrative expenses were 27.7% for the nine months ended October 31, 2007, as compared to 25.2% for the nine months ended October 31, 2007. The increase in selling, general and administrative expenses, on a dollar and percentage basis, is attributed to additional costs related to our continued investment into the boys, action sports, E-commerce and retail businesses, as well as certain costs associated with the expansion of the women's contemporary business. Additionally, we made substantial management changes in the UK during fiscal 2009 and are in the process of repositioning our European business, which has caused us to incur additional expenses.
As part of our strategic review process, we have identified selling, general and administrative expense reductions in the $14.0 to $15.0 million range for fiscal 2010. The identified initiatives include: the consolidation of the Tampa bottom's production department; headcount reduction in the men's specialty store businesses; reduction in the shared services cost structure and advertising and promotion budget for the men's specialty store business; restructuring of the Perry Ellis Outlet operations; the
annualization of distribution cost savings due to the closing of the Winnsboro distribution center; and a hiring freeze and reduction of travel and other discretionary expenses. Most of the identified expenses in connection with this strategic review are expected to be incurred during the fourth quarter of fiscal 2009. Further savings initiatives within the Strategic Review framework are currently under evaluation.
Depreciation and amortization. Depreciation and amortization for the three months ended October 31, 2008 was $3.6 million, an increase of $0.1 million, or 2.9%, from $3.5 million for the three months ended October 31, 2007. Depreciation and amortization for the nine months ended October 31, 2008, was $10.9 million, an increase of $1.3 million, or 13.5%, from $9.6 million for the nine months ended October 31, 2007. The increase is primarily due to the increase in property and equipment, primarily from our Oracle retail system, and our continued expansion in retail stores.
Impairment on marketable securities. During the three and nine months ended October 31, 2008, we determined that certain marketable securities that were classified as available for sale were deemed to be other than temporarily impaired. Accordingly, an impairment in the amount of approximately $0.6 million and $2.6 million was recognized for the three and nine months ended October 31, 2008.
Interest expense. Interest expense for the three months ended October 31, 2008 was $4.4 million, an increase of $0.3 million, or 7.3%, from $4.1 million for the three months ended October 31, 2007. The slight increase in interest expense during the third quarter is primarily attributable to the increase of the average balance in our senior credit facility partially offset by lower interest rates. Interest expense for the nine months ended October 31, 2008 was $13.1 million, a decrease of $0.8 million, or 5.8%, from $13.9 million for the nine months ended October 31, 2007. The overall decrease in interest expense is primarily attributable to the overall reduction of the average balance and average rate in our senior credit facility for the nine months ended October 31, 2008. We began the first fiscal quarter of 2009 with no borrowings on our senior credit facility and ended the third quarter with $48.2 million as of October 31, 2008.
Income taxes. The income tax provision for the three months ended October 31, 2008, was $2.2 million, a $2.4 million decrease as compared to $4.6 million for the three months ended October 31, 2007. For the three months ended October 31, 2008, our effective tax rate was 30.0% as compared to 34.9% for the three months ended October 31, 2007. The primary reason for the decrease in the effective tax rate was due to our increase in international operations, as a percentage of total consolidated taxable income, which experience a lower tax rate.
Our income tax provision for the nine months ended October 31, 2008, was $4.3 million, a $5.9 million decrease as compared to $10.2 million for the nine months ended October 31, 2007. For the nine months ended October 31, 2008, our effective tax rate was 31.6% as compared to 35.3% for the nine months ended October 31, 2007. The decrease in the tax rate is attributed to the total amount of unrecognized tax benefits decreasing during the first nine months of fiscal 2009, our increase in international operations, which experience a lower tax rate and the adjustment of our Federal net operating losses and the associated deferred tax asset during the nine months ended October 31, 2008.
Net income. Net income for the three months ended October 31, 2008 was $5.0 million, a decrease of $3.5 million, or 41.2%, as compared to $8.5 million for the three months ended October 31, 2007. Net income for the nine months ended October 31, 2008 was $8.7 million, a decrease of $9.6 million, or 52.5%, as compared to net income of $18.3 million for the nine months ended October 31, 2007. The changes in operating results were due to the items described above.
Liquidity and Capital Resources
We rely primarily upon cash flow from operations and borrowings under our senior credit facility and letter of credit facilities to finance our operations, acquisitions and capital expenditures. We believe that as a result of the growth in our business, our working capital requirements will increase during the last quarter of the fiscal year, as a result of planned increases in sales. As of October 31, 2008, our total working capital was $247.5 million as compared to $217.9 million as of January 31, 2008. We believe that our cash flows from operations and available borrowings under our senior credit facility and letter of credit facilities are sufficient to meet our working capital needs. We also believe that our real estate assets which have a net book value of $28.2 million at October 31, 2008, have a higher market value. These real estate assets provide us with additional capital resources. Additional borrowings against these real estate assets, however would be subject to certain loan to value criteria established by lending institutions. Currently we have mortgage loans on these properties totaling $25.2 million.
Net cash used in operating activities was $7.1 million for the nine months ended October 31, 2008, as compared to cash provided by operating activities of $52.7 million for the nine months ended October 31, 2007. The decrease of $59.8 million in the level of cash provided by operating activities for the nine months ended October 31, 2008, as compared to the nine months ended October 31, 2007, is primarily attributable to a decrease in net income of $9.6 million, an increase in accounts receivable of $14.0 million, an increase in prepaid income taxes of $8.2 million, and the reduction of accounts payable, accrued expenses and other liabilities in the amount of $22.1; partially offset by a decrease in inventory of $16.7 million due to tighter controls in inventory planning and an anticipated reduction in certain replenishment programs. For the nine months ended October 31, 2007, accounts receivable decreased $10.4 million, inventory decreased $17.1 million, and unearned revenues increased $16.8 million; these amounts were offset by the reduction of accounts payable, accrued expenses and other liabilities in the amount of $17.9 million.
Net cash used in investing activities was $42.5 million for the nine months ended October 31, 2008, as compared to cash used in investing activities of $12.2 million for the nine months ended October 31, 2007. The net cash used during the first nine months of Fiscal 2009 primarily reflects the purchase of property and equipment in the amount of $8.5 million and the acquisition of the C&C California and Laundry by Shelli Segal brands and inventory for $33.6 million, as compared to net cash used in the amount of $12.2 million during the same period in Fiscal 2008 for the net purchase of marketable securities and property and equipment. We anticipate capital expenditures during fiscal 2009 of $12 million in technology and systems, retail stores, and other expenditures.
Net cash provided by financing activities for the nine months ended October 31, 2008, was $45.5 million, as compared to net cash used in financing activities for the nine months ended October 31, 2007 of $38.1 million. The net cash provided during the first nine months of Fiscal 2009 primarily reflects the net borrowings on our senior credit facility of $48.2 million and the proceeds received from the exercise of stock options of $3.8 million, offset by the payments of $1.3 million on our mortgages, purchase of treasury stock of $5.7 million and a payment of a loan to a minority interest partner of $0.6 million. The net cash used in financing activities for the nine months ended October 31, 2007, primarily reflects the net payments on our senior credit facility of $38.3 million. The use of cash was offset by proceeds received from the exercise of stock options of $0.7 million. In September 2008, the Board of Directors extended the stock repurchase program, which authorizes us to repurchase up to $20 million of our common stock for cash over the next twelve months. Although the Board of Directors allocated a maximum of $20 million to carry out the program, we are not obligated to purchase any specific number of outstanding shares, and will reevaluate the program on an ongoing basis. Purchases under this plan have amounted to $9.8 million through October 31, 2008.
Acquisitions
On February 4, 2008, we completed the acquisition of the C&C California and Laundry by Shelli Segal brands and related assets from Liz Claiborne Inc. The acquisition was financed through existing cash and borrowings under our existing credit facility. The transaction was valued at $34.0 million.
Senior Credit Facility
In October 2008, we amended our senior credit facility. In connection with the amendment, we paid approximately $338,000 in financing fees. These fees will be amortized over the term of our senior credit facility. The following is a description of the terms of our senior credit facility with Wachovia Bank, National Association, et al, as amended, and does not purport to be complete and is subject to, and qualified in its entirety by reference to, all the provisions of the senior credit facility: (i) the line is up to $125 million with the opportunity to increase this amount in $25 million increments up to $200 million; (ii) the inventory borrowing limit is $75 million; (iii) the sublimit for letters of credit is up to $40 million; (iv) the amount of letter of credit facilities available outside of the facility is $110 million and (v) the outstanding balance is due at the maturity date of February 1, 2012.
Certain Covenants. The senior credit facility contains certain covenants, which, among other things, requires us to maintain a minimum EBITDA if availability falls below a certain minimum. It may restrict our ability and the ability of our subsidiaries to, among other things, incur additional indebtedness in certain circumstances, redeem or repurchase capital stock, make certain investments, or sell assets. We are prohibited from paying cash dividends under these covenants. We are not aware of any non-compliance with any of our covenants under the senior credit facility. We could be materially harmed if we violate any covenants as the lenders under the senior credit facility could declare all amounts outstanding thereunder, together with accrued interest, to be immediately due and payable. If we are unable to repay those amounts, the lenders could proceed against our assets. In addition, a violation could also constitute a cross-default under the indenture and mortgage, resulting in all of our debt obligations becoming immediately due and payable, which we may not be able to satisfy.
Borrowing Base. Borrowings under our senior credit facility are limited under its terms to a borrowing base calculation, which generally restricts the outstanding balances to the lesser of either (1) the sum of (a) 85.0% of eligible receivables plus (b) 85.0% of its eligible factored accounts receivables up to $10.0 million plus (c) the lesser of (i) the inventory loan limit of $75 million, or (ii) the lesser of (A) 65.0% of eligible finished goods inventory, or (B) 85.0% of the net recovery percentage (as defined in the senior credit facility) of eligible inventory, or (2) the loan limit; and in each case minus (x) 35.0% of the amount of outstanding letters of credit for eligible inventory, (y) the full amount of all other outstanding letters of credit issued pursuant to the senior credit facility which are not fully secured by cash collateral, and (z) licensing reserves for which we are the licensee of certain branded products.
Interest. Interest on the principal balance under our senior credit facility accrues, at our option, at either (a) the greater of Wachovia's prime lending rate or the Federal Funds rate; plus 1/2% plus a margin spread based upon the sum of our quarterly average excess availability plus excess cash or (b) the rate quoted by Wachovia as the average monthly Eurodollar Rate for 1-month Eurodollar deposits with 200 to 275 basis point adjustments depending upon the sum of our quarterly average excess availability plus excess cash at the time of borrowing.
Security. As security for the indebtedness under the senior credit facility, we granted the lenders a first priority security interest in substantially all of our existing and future assets other than our trademark portfolio and real estate owned, including, without limitation, accounts receivable, inventory, deposit accounts, general intangibles, equipment and capital stock or membership interests, as the case may be, of certain subsidiaries.
Letter of Credit Facilities
As of October 31, 2008, we maintained five U.S. dollar letter of credit facilities totaling $130.0 million, one letter of credit facility totaling $3.1 million utilized by our Canadian joint venture, and one letter of credit facility totaling $0.8 million utilized by
our United Kingdom subsidiary. Each letter of credit is secured primarily by the consignment of merchandise in transit under that letter of credit and certain subordinated liens on our assets. As of October 31, 2008, there was $114.6 million available under existing letter of credit facilities.
$150 Million Senior Subordinated Notes Payable
In fiscal 2004, we issued $150 million 8 7/8% senior subordinated notes due September 15, 2013. The proceeds of this offering were used to redeem previously issued $100 million 12 1/4 % senior subordinated notes and to pay down the outstanding balance of the senior credit facility at that time. The proceeds to us were $146.8 million yielding an effective interest rate of 9.1%.
Certain Covenants. The indenture governing the senior subordinated notes contains certain covenants which restrict our ability and the ability of our subsidiaries to, among other things, incur additional indebtedness in certain circumstances, redeem or repurchase capital stock, make certain investments, or sell assets. We are not aware of any non-compliance with any of the covenants in this indenture. We are prohibited from paying cash dividends under these covenants. We could be materially harmed if we violate any covenants because the indenture's trustee could declare the outstanding notes, together with accrued interest, to be immediately due and payable, which we may not be able to satisfy. In addition, a violation could also constitute a cross-default under the senior credit facility, the letter of credit facilities, and the real estate mortgage loan resulting in all of our debt obligations becoming immediately due and payable, which we may not be able to satisfy.
Real Estate Mortgage Loans
In fiscal 2003, we acquired our main administrative office, warehouse and distribution facility in Miami and partially financed the acquisition of the facility with an $11.6 million mortgage loan. The real estate mortgage loan contains certain covenants. We are not aware of any non-compliance with any of our covenants under the real estate mortgage. We could be materially harmed if we violate any covenants because the lender under the real estate mortgage loan could declare all amounts outstanding thereunder to be immediately due and payable, which we may not be able to satisfy. In addition, a violation could constitute a cross-default under our senior credit facility, the letter of credit facilities and indenture relating to our senior subordinated notes resulting in all our of debt obligations becoming immediately due and payable, which we may not be able to satisfy. Interest is fixed at 7.123%. On August 18, 2008, we executed an extension commitment of the real estate mortgage loan extending the maturity until July 1, 2010.
In October 2005, we acquired three administrative office units in a building in Beijing, China. The aggregate purchase price was $2.3 million, including closing costs. These purchases were partially financed with three variable interest mortgage loans totaling $1.2 million dollars in the aggregate. During March 2008 we paid off the three variable interest mortgage loans.
In June 2006, we entered into a mortgage loan for $15 million secured by our . . .
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