Add
PERY to Portfolio
Set Alert
Email to a
Friend
| |||
|
|
Quotes & Info
|
| PERY > SEC Filings for PERY > Form 10-Q on 5-Jun-2009 | All Recent SEC Filings |
5-Jun-2009
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, 2009.
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,
• recent and economic conditions, including turmoil in the financial and credit markets,
• 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,
• our ability to compete,
• 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, 2009 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 months ended May 2, 2009, 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, 2009.
Results of Operations
The following is a discussion of the results of operations for the three month period in the first quarter of the fiscal year ending January 30, 2010 ("fiscal 2010") compared with the three month period in the first quarter of the fiscal year ended January 31, 2009 ("fiscal 2009").
Results of Operations - three months ended May 2, 2009 compared to the three months ended April 30, 2008
Net sales. Net sales for the three months ended May 2, 2009 were $214.0 million, a decrease of $23.8 million, or 10.0%, from $237.8 million for the three months ended April 30, 2008. This decrease was primarily driven by the transition of the Perry Ellis dress shirts business to a licensed product, which amounted to $3.4 million, and the exiting of Docker's Outwear and numerous specialty store programs. Additionally several of our previous customers including Mervyns and Goody's, which accounted for sales of approximately $6.2 million during the first quarter of fiscal 2009, subsequently filed for bankruptcy and liquidated as a result. Further adding to the decrease was our planned reduction of $7.0 million in our bottoms private label and replenishment business. These decreases were partially offset by organic growth of several of our platforms- golf lifestyle, swim, direct retail and our Hispanic brands.
Royalty income. Royalty income for the three months ended May 2, 2009 was $6.0 million, an increase of $0.2 million, or 3.4%, from $5.8 million for the three months ended April 30, 2008. The increase was primarily driven by the new Perry Ellis dress shirt license agreement, partially offset by the loss of some smaller license agreements.
Gross profit. Gross profit was $69.2 million for the three months ended May 2, 2009, a decrease of $15.4 million, or 18.2%, from $84.6 million for the three months ended April 30, 2008.
As a percentage of total revenue, gross profit margins were 31.5% for the three months ended May 2, 2009, as compared to 34.7% for the three months ended April 30, 2008, a decrease of 326 basis points. The decrease in the gross profit percentage was attributed to the exit of the licensed PING golf business at the corporate channel and by the unusually promotional retail environment, particularly the private label program within bottoms and swim. This decrease was partially offset by the increase in royalty income from our new Perry Ellis dress shirt license agreement.
Wholesale gross profit margins (which exclude the impact of royalty income) decreased to 29.5% for the three months ended May 2, 2009 from 33.1% for the three months ended April 30, 2008. The decrease of 359 basis points is attributed to the unusually promotional retail environment, particularly the private label program within bottoms and swim.
Selling, general and administrative expenses. Selling, general and administrative expenses for the three months ended May 2, 2009 were $54.4 million, a decrease of $7.9 million, or 12.7%, from $62.3 million for the three months ended April 30, 2008. The decrease, primarily in our wholesale business, in selling, general and administrative expenses, on a dollar basis, is attributed to a decrease in distribution costs mainly driven by the closure of our Winnsboro warehouse, a reduction in advertising expenses of $2.7 million, a decrease of third party commissions as a result of our exiting of certain specialty store programs and as a result of additional cost saving strategies identified during the strategic review process we began during our third quarter of fiscal 2009. As part of our strategic review process, we identified selling, general and administrative expense reductions of approximately $15 million for fiscal 2010. The identified initiatives included: the consolidation of the Tampa bottom's production department; reductions in headcount and advertising and promotion budget in the men's specialty store businesses; reduction in the shared services cost structure; 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.
As a percentage of total revenues, selling, general and administrative expenses were 24.7% for the three months ended April 30, 2008, as compared to 25.6% for the three months ended April 30, 2008. As a percentage of total revenue during the first quarter of fiscal 2010, this decrease was in line with our anticipated results and primarily due to the factors explained above.
Depreciation and amortization. Depreciation and amortization for the three months ended May 2, 2009 was $3.6 million, a decrease of $0.1 million, or 2.7%, from $3.7 million for the three months ended April 30, 2008. Depreciation and amortization remained essentially flat as compared to prior year, with the slight decrease attributed to the write off of the long lived assets in the amount of $1.6 million, during the fourth quarter of fiscal 2009.
Interest expense. Interest expense for the three months ended May 2, 2009, was $4.6 million, an increase of $0.1 million, or 2.2%, from $4.5 million for the three months ended April 30, 2008. The overall increase in interest expense is primarily attributable to a slightly higher average balance on our senior credit facility as compared to the prior year. We began the first fiscal quarter of 2010 with $54.4 in borrowings on the senior credit facility and ended the quarter with $38.3 million as of May 2, 2009 as compared to $65.3 million as of April 30, 2008.
Income taxes. The income tax provision for the three months ended May 2, 2009, was $0.8 million, a $3.9 million decrease as compared to $4.7 million for the three months ended April 30, 2008. For the three months ended May 2, 2009, our effective tax rate was 12.5% as compared to 33.3% for the three months ended April 30, 2008. The decrease in the tax rate is attributed to the total amount of unrecognized tax benefits decreasing during the first quarter of fiscal 2010 and the change in ratio of income between domestic and foreign operations, of which the foreign operations are taxed at lower statutory tax rates.
Net income attributed to Perry Ellis International, Inc. The net income for the three months ended May 2, 2009 was $5.8 million, a decrease of $3.3 million, or 36.3%, as compared to $9.1 million for the three months ended April 30, 2008. 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 our strategic review process and our increased discipline in our working capital and cash flow management, our working capital requirements will decrease for the remainder of the year. As of May 2, 2009, our total working capital was $235.2 million as compared to $241.1 million as of January 31, 2009 and $204.0 million as of April 30, 2008. During the first quarter of fiscal 2010, an underutilized $30 million letter of credit facility was terminated. Traditionally, our letter of credit facilities were used for trade financing. We have shifted our finance strategy from relying on letter of credit facilities to direct trade terms with our vendors, and as such, we did not need the excess capacity provided by this letter of credit facility. We believe that our cash flows from operations and availability under our senior credit facility and remaining letter of credit facilities are sufficient to meet our working capital needs.
Net cash provided by operating activities was $17.4 million for the three months ended May 2, 2009, as compared to cash used in operating activities of $31.1 million for the three months ended April 30, 2008. The cash provided by operating activities for three months ended May 2, 2009 is primarily attributable to a decrease in inventory of $24.9 million due to tighter controls in inventory planning and a decrease of other current assets, primarily prepaid taxes in the amount of $6 million; offset by an increase in accounts receivable and a reduction of our accounts payable, accrued expenses and accrued interest payable. The cash used in operating activities for the three months ended April 30, 2008 is primarily attributable to an increase in accounts receivable of $34.4 million, a decrease in accounts payable of $11.5 million; offset by a decrease in inventory of $3.8 million due to tighter controls in inventory planning and an anticipated reduction in certain replenishment programs.
Net cash used in investing activities was $0.9 million for the three months ended May 2, 2009, as compared to cash used in investing activities of $36.0 million for the three months ended April 30, 2008. The net cash used during the first three months of fiscal 2010 primarily reflects the purchase of property and equipment in the amount of $0.9 million, as compared to net cash used in the purchase of property and equipment in the amount of $2.0 million and the acquisition of the C&C California and Laundry by Shelli Segal brands and inventory for $34.0 million during the same period in fiscal 2009. We anticipate capital expenditures during fiscal 2010 of $7 million to $8 million in technology and systems, retail stores, and other expenditures.
Net cash used in financing activities for the three months ended May 2, 2009, was $18.1 million, as compared to net cash provided by financing activities for the three months ended April 30, 2008 of $67.9 million. The net cash used during the first three months of fiscal 2010 primarily reflects the net payments on our senior credit facility of $16.2 million, payments of $0.1 million on our mortgages, and purchase of treasury stock of $1.8 million. The net cash provided during the first three months of fiscal 2009 primarily reflects the net borrowings on our senior credit facility of $65.3 million, of which $34 million was used in the acquisition of the C&C California and Laundry by Shelli Segal brands discussed above, and the proceeds received from the exercise of stock options of $3.3 million, offset by net cash used in financing activities for the payments of $1.1 million on our mortgages, purchase of treasury stock of $0.2 million and a payment of loan to noncontrolling interest of $0.6 million.
The Board of Directors has approved a stock repurchase program, which authorizes us to continue to repurchase up to $20 million of our common stock for cash over the next five 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. Through the first quarter of fiscal 2010 total purchases of $17.4 million have been made under this plan.
Acquisitions
On February 4, 2008, the Company 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 the Company's existing senior credit facility. The transaction was valued at $34 million. Both brands are ideally positioned to address the fastest growing segment within women's apparel: contemporary. Both brands sell in luxury retail stores and high-end specialty boutiques. Together they created our women's contemporary business platform. The results of operations of the acquired brands have been included in the Company's operations beginning as of the date of the acquisition.
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 allowed outside of the facility is $110 million and (v) the outstanding balance is due at the maturity date of February 1, 2012. At May 2, 2009, the balance of the senior credit facility totaled $38.3 million.
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 of 100 to 175 basis points based upon the sum of our quarterly average excess availability plus excess cash for the immediately preceding fiscal quarter, at the time of borrowing or (b) the rate quoted by Wachovia as the average monthly Eurodollar Rate for 1-month Eurodollar deposits plus a margin spread of with 200 to 275 basis points based upon the sum of our quarterly average excess availability plus excess cash for the immediately preceding fiscal quarter, 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 May 2, 2009, we maintained two U.S. dollar letter of credit facilities totaling $51.8 million, one letter of credit facility totaling $3.2 million utilized by our Canadian joint venture, and one letter of credit facility totaling $0.9 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. During the first quarter of fiscal 2010, one credit line totaling an estimated $30.0 million dollars was cancelled. As of May 2, 2009, there was $47.8 million available under the existing letter of credit facilities.
$150 Million Senior Subordinated Notes Payable
In fiscal 2004, we issued $150 million 87/8% senior subordinated notes, due September 15, 2013. The proceeds of this offering were used to redeem its then outstanding 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 currently in compliance with all 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 resulting in all of our debt obligations becoming immediately due and payable, which we may not be able to satisfy.
Real Estate Mortgage Loans
Our main administrative office, warehouse and distribution facility is a 240,000 square foot facility in Miami, Florida. The facility was partially financed with an $11.6 million real estate 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%. In August 2008, we executed a maturity extension of the real estate mortgage loan until July 1, 2010. At May 2, 2009, the balance of the real estate mortgage loan totaled $10.9 million, of which $190,000 is due within one year.
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, the Company entered into a mortgage loan for $15 million secured by its Tampa facility. The loan is due on June 7, 2016. Principal and interest of $297,000 are due quarterly based on a 20 year amortization with the outstanding principal due at maturity. Interest is set at 6.25% for the first five years, at which point it will be reset based on the terms and conditions of the promissory note. At May 2, 2009, the balance of the real estate mortgage loan totaled $14.4 million, of which $312,000 is due within one year.
Off-Balance Sheet Arrangements
We are not a party to any "off-balance sheet arrangements" as defined by applicable GAAP and SEC rules.
Effects of Inflation and Foreign Currency Fluctuations
We do not believe that inflation or foreign currency fluctuations significantly affected our results of operations for the three months ended May 2, 2009.
|
|