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| PERY > SEC Filings for PERY > Form 10-Q on 9-Sep-2009 | All Recent SEC Filings |
9-Sep-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 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,
• the level of consumer spending for apparel and other merchandise,
• 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 six months ended August 1, 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 and six month periods of the fiscal year ending January 31, 2010 ("fiscal 2010") compared with the three and six month periods of the fiscal year ended January 31, 2009 ("fiscal 2009").
Results of Operations - three and six months ended August 1, 2009 compared to three and six months ended July 31, 2008.
Net sales. Net sales for the three months ended August 1, 2009 were $153.0 million, a decrease of $34.4 million, or 18.4%, from $187.4 million for the three months ended July 31, 2008. This decrease was primarily driven by the weakness at the department store channel for swimwear product, affected by unusually cold weather, and for the Perry Ellis brand which accounted for $11 million. A reduction of $3 million resulted from the transition of the Perry Ellis dress shirts business to a licensed product and the exiting of Dockers Outwear and numerous specialty store programs. In addition, the door count reduction for the Perry Ellis Collection at the department store distribution channel, accounting for a $3.5 million reduction. The reduction due to the anticipated deceleration of PING golf business. Also, several of our previous customers, including Mervyns and Goody's, which accounted for sales of approximately $5.0 million during the second 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 private label and replenishment business. These decreases were partially offset by organic growth of several of our platforms- golf lifestyle, Merona swim program, and our Hispanic brands.
Net sales for the six months ended August 1, 2009 were $367.0 million, a decrease of $58.2 million, or 13.7%, from $425.2 million for the six months ended July 31, 2008. This decrease was primarily driven by the transition of the Perry Ellis dress shirts business to a licensed product; the exit of PING, Dockers Outwear and numerous specialty store programs; several of our previous customers including Mervyns and Goody's, which accounted for sales of approximately $11.2 million during the first half of fiscal 2009, subsequently filing for bankruptcy and liquidated as a result; and our planned reduction of $14.0 million in our private label and replenishment business. These decreases were partially offset by organic growth of several of our platforms- golf lifestyle and our Hispanic brands.
Royalty income. Royalty income for the three months ended August 1, 2009 was $6.2 million, a decrease of $0.1 million, or 1.6%, from $6.3 million for the three months ended July 31, 2008. The decrease was driven by the exit of the Hartmarx license, partially offset by the increase driven by the new Perry Ellis dress shirt license agreement. Royalty income for the six months ended August 1, 2009 was $12.2 million, an increase of $0.1 million, or 0.8%, from $12.1 million for the six months ended July 31, 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 $49.2 million for the three months ended August 1, 2009, a decrease of $13.0 million, or 20.9%, from $62.2 million for the three months ended July 31, 2008. Gross profit was $118.4 million for the six months ended August 1, 2009, as compared to $146.8 million for six months ended July 31, 2008, a decrease of 19.3%.
As a percentage of total revenue, gross profit margins were 30.9% for the three months ended August 1, 2009, as compared to 32.1% for the three months ended July 31, 2009, a decrease of 122 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 in 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 and in the reduction of our sales allowance and chargebacks by 200 basis points. As a percentage of total revenue, gross profit margins were 31.2% for the six months ended August 1, 2009, as compared to 33.6% for the six months ended July 31, 2008, a decrease of 234 basis points. The decrease in the gross profit percentage came from the factors described above.
The wholesale gross profit margin (which excludes the impact of royalty income) for the three months ended August 1, 2009 was 28.1%, as compared to 29.9% for the three months ended July 31, 2008. The wholesale gross profit margin percentage decreased for the six months ended August 1, 2009, to 30.0%, as compared to 31.7% for the six months ended July 31, 2008. The decrease for the three and six months ended August 1, 2009 was primarily attributable to the unusually promotional retail environment in the private label program within bottoms and swim.
Selling, general and administrative expenses. Selling, general and administrative expenses for the three months ended August 1, 2009 was $47.7 million, a decrease of $12.6 million, or 20.9%, from $60.3 million for the three months ended July 31, 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, a reduction in advertising expenses of $2.6 million, a decrease of third party commissions as a result of our exiting of certain specialty store programs and through our efforts to control sample costs.
As a percentage of total revenues, selling, general and administrative expenses was 30.0% for the three months ended August 1, 2009, as compared to 31.1% for the three months ended July 31, 2008. As a percentage of total revenue during the second quarter of fiscal 2010, this decrease was in line with our anticipated results and primarily due to the factors explained above.
Selling, general and administrative expenses for the six months ended August 1, 2009, was $102.1 million, a decrease of $20.5 million, or 16.7%, from $122.6 million for the six months ended July 31, 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 $5.3 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. Thus far we have had a cost reduction of $19 million and anticipate that there is an additional $5 million to $10 million in savings for the second half of fiscal 2010.
As a percentage of total revenues, selling, general and administrative expenses was 26.9% for the six months ended August 1, 2009, as compared to 28.0% for the six months ended July 31, 2008. As a percentage of total revenue during the first half 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 August 1, 2009 was $3.4 million, a decrease of $0.3 million, or 8.1%, from $3.7 million for the three months ended July 31, 2008. Depreciation and amortization for the six months ended August 1, 2009, was $7.0 million, a decrease of $0.3 million, or 4.1%, from $7.3 million for the six months ended July 31, 2008. Depreciation and amortization decreased slightly as compared to the 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.
Impairment on marketable securities. During the second quarter of fiscal 2009, we determined that certain marketable securities which were classified as available for sale were deemed to be other than temporarily impaired. Accordingly, an impairment in the amount of approximately $2.0 million was recognized for the three and six months ended July 31, 2008.
Interest expense. Interest expense for the three months ended August 1, 2009, was $4.0 million, a decrease of $0.3 million, or 7.0%, from $4.3 million for the three months ended July 31, 2008. Interest expense for the six months ended August 1, 2009, was $8.6 million, a decrease of $0.2 million, or 2.3%, from $8.8 million for the six months ended July 31, 2008. The overall decrease in interest expense is primarily attributable to a lower average balance on our senior credit facility as compared to the prior year. We began the first fiscal quarter of 2010 with $54.4 million in borrowings on the senior credit facility and ended the second quarter with no outstanding borrowings as compared to $22.3 million as of July 31, 2008.
Income taxes. The income tax benefit for the three months ended August 1, 2009, was ($0.7) million, a decrease of $2 million as compared to the ($2.7) million for the three months ended July 31, 2008. For the three months ended August 1, 2009, our effective tax rate was 11.9% as compared to 33.1% for the three months ended July 31, 2008. The primary reason for the decrease in the effective rate was due to the change in ratio of income between domestic and foreign operations, of which the foreign operations are taxed at lower statutory tax rates.
Our income tax provision for the six months ended August 1, 2009 was $0.1 million, a $1.9 million decrease as compared to $2.0 million for the six months ended July 31, 2008. For the six months ended August 1, 2009, our effective tax rate was 17.3% as compared to 33.5% for the six months ended July 31, 2008. The decrease in the effective tax rate is attributed to the total amount of unrecognized tax benefits during the first half 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 (loss) income. The net (loss) for the three months ended August 1, 2009 was ($5.3) million, a decrease of $0.1 million, as compared to the net (loss) of ($5.4) million for the three months ended July 31, 2008. Net income for the six months ended August 1, 2009 was $0.5 million, a decrease of $3.2 million, or 86.5%, as compared to net income of $3.7 million for the six months ended July 31, 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 August 1, 2009, our total working capital was
$185.9 million as compared to $241.1 million as of January 31, 2009 and $199.7
million as of July 31, 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 $78.5 million for the six months ended August 1, 2009, as compared to net cash provided by operating activities of $16.4 million for the six months ended July 31, 2008. The increase of $62.1 million in the level of cash provided by operating activities for the six months ended August 1, 2009, as compared to the six months ended July 31, 2008, is primarily attributable to a decrease in accounts receivable of $43.2 million due to lower sales and our collection efforts, a decrease in inventory of $37.1 million due to improved inventory planning and a decrease of prepaid taxes of $2.8 million; offset by the reduction of accounts payable, accrued expenses and other liabilities in the amount of $14.8 million and the decrease of unearned revenues and other liabilities of $4.0 million. For the six months ended July 31, 2008, cash provided by operating activities was primarily attributable to a decrease in accounts receivable of $22.9 million due to our collection efforts, and a decrease in inventory of $10.2 million due to improved inventory planning; offset by the reduction of accounts payable, accrued expenses and other liabilities in the amount of $19.2 million and the increase of prepaid taxes of $9.6 million.
Net cash used in investing activities was $1.6 million for the six months ended August 1, 2009, as compared to net cash used in investing activities of $38.7 million for the six months ended July 31, 2008. The net cash used during the first half of Fiscal 2010 primarily reflects the purchase of property and equipment in the amount of $1.6 million, as compared to net cash used during the first half of Fiscal 2009 for the purchase of property and equipment in the amount of $4.7 million and the acquisition of the C&C California and Laundry by Shelli Segal brands and inventory for $33.6 million. Additionally we entered into a capital lease for the acquisition of certain equipment in the amount of $0.9 million which was categorized as a non-cash financing activity. We anticipate capital expenditures during fiscal 2010 of $6 million to $7 million in technology and systems, retail stores, and other expenditures.
Net cash used in financing activities for the six months ended August 1, 2009, was $56.5 million, as compared to net cash provided by financing activities for the six months ended July 31, 2008 of $25.1 million. The net cash used during the first half of fiscal 2010 primarily reflects the net payments on our senior credit facility of $54.4 million, the payments of $0.4 million on our
mortgages and capital leases, and the purchase of treasury stock of $1.8 million. The net cash provided during the first half of fiscal 2009 primarily reflects the net borrowings on our senior credit facility of $22.3 million and the proceeds received from the exercise of stock options of $3.6 million, offset by the payments of $1.2 million on our mortgages, purchase of treasury stock of $0.2 million and a payment of loan to a 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 three 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 second 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 August 1, 2009, we did not have any borrowings under the senior credit facility.
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 August 1, 2009, we maintained two U.S. dollar letter of credit facilities totaling $50.1 million, one letter of credit facility totaling $3.5 million utilized by our Canadian joint venture, and one letter of credit facility totaling $1.0 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 August 1, 2009, there was $45.5 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 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 . . .
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