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RDEN > SEC Filings for RDEN > Form 10-Q on 9-Nov-2012All Recent SEC Filings

Show all filings for ELIZABETH ARDEN INC

Form 10-Q for ELIZABETH ARDEN INC


9-Nov-2012

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This discussion should be read in conjunction with the Unaudited Consolidated Financial Statements and related notes contained in this quarterly report and the Consolidated Financial Statements and related notes and the Management's Discussion and Analysis of Financial Condition and Results of Operations appearing in our Annual Report on Form 10-K for the year ended June 30, 2012. The results of operations for an interim period may not give a true indication of results for the year. In the following discussion, all comparisons are with the corresponding items in the prior year period.

Overview

     We are a global prestige beauty products company with an extensive
portfolio of prestige fragrance, skin care and cosmetics brands. Our extensive
product portfolio includes the following:

Elizabeth Arden Brand The Elizabeth Arden skin care brands: Visible Difference,
                      Ceramide, Prevage, and Eight Hour Cream, Elizabeth Arden branded
                      lipstick, foundation and other color cosmetics products, and the
                      Elizabeth Arden fragrances: Red Door, Elizabeth Arden 5th
                      Avenue, and Elizabeth Arden green tea

Celebrity Fragrances  The fragrance brands of Britney Spears, Elizabeth Taylor, Mariah
                      Carey, Taylor Swift, Justin Bieber, Nicki Minaj and Usher

Lifestyle Fragrances  Curve, Giorgio Beverly Hills, PS Fine Cologne and White
                      Shoulders

Designer Fragrances   Juicy Couture, Alfred Sung, BCBGMAXAZRIA, Ed Hardy, Geoffrey
                      Beene, Halston, John Varvatos, Kate Spade New York, Lucky,
                      Rocawear and True Religion

In addition to our owned and licensed fragrance brands, we distribute approximately 250 additional prestige fragrance brands, primarily in the United States, through distribution agreements and other purchasing arrangements.

In May 2012, we acquired the global licenses and certain related assets, including inventory, for the Ed Hardy, True Religion and BCBGMAXAZRIA fragrance brands from New Wave Fragrances, LLC. Prior to the acquisition, we had been acting as a distributor of the Ed Hardy, True Religion and BCBGMAXAZRIA fragrances to certain mid-tier and mass retailers in the North America. In June 2012, we also acquired the global licenses and certain assets related to the Justin Bieber and Nicki Minaj fragrance brands, including inventory of the Justin Bieber fragrances, from Give Back Brands LLC. Both of these transactions were accounted for as business combinations.

For ease of reference in this Form 10-Q, the acquisitions from New Wave LLC and Give Back Brands LLC are referred to herein on a collective basis as the 2012 acquisitions.

Our business strategy is currently focused on two important initiatives:
the global repositioning of the Elizabeth Arden brand and expanding the market penetration of our prestige fragrance portfolio in international markets, especially in the large European fragrance market. We also intend to continue to increase net sales, operating margins and earnings by continuing to expand the prestige fragrance category at mass retail customers in North America and continuing to expand operating margins, working capital efficiency and return on invested capital. We believe that our focus on organic growth opportunities for our existing brands, new licensing opportunities and acquisitions, and new product innovation will assist us in achieving these goals.

We recently commenced the roll-out of a comprehensive brand repositioning for the Elizabeth Arden brand, which is designed to honor the heritage of the brand while modernizing the brand's presentation and increasing its relevance among target consumers. The brand repositioning includes improved product formulation, package redesign and counter redesign as well as SKU rationalization. The initial roll-out will be to a limited number of retail doors. We began shipping the new product assortment to retailers in June 2012 and expect to replace most of the high-priority retail counters with the new counters in October 2012. The new counter design is intended to bring key aspects of the Elizabeth Arden and Red Door Spa brand equities to the retail environment to create a more uniform, modern and engaging shopping experience. The roll-out will continue throughout fiscal year 2013 and beyond. Based on the results of the initial roll-out and plans for a more broad-based global roll-out, we may incur costs, expenses and capital expenditures in future periods that could be material to those periods. The specific facts and circumstances of the global roll-out will impact the timing and amount of any such costs, expenses and capital expenditures. We currently expect to incur pre-tax non-recurring charges in fiscal 2013 of approximately $8 million associated with the Elizabeth Arden brand repositioning resulting from product assortment changes.

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In September, 2012, we invested $5.5 million, including transaction costs, for a minority investment in Elizabeth Arden Salon Holdings, an unrelated entity whose subsidiaries operate the Elizabeth Arden Red Door Spas and the Mario Tricoci Hair Salons. The investment was made with the intent of accelerating the growth of the spa business in parallel with the growth of the Elizabeth Arden brand and the Elizabeth Arden brand repositioning. The investment, which is in the form of a secured convertible note bearing interest at 2%, has been accounted for using the cost method and at September 30, 2012, is included in other assets on our unaudited consolidated balance sheet. Under the terms of the agreement with Salon Holdings, we will invest an additional $4.2 million by May 1, 2013.

We continue to focus on (i) expanding gross margins through increased focus on product mix, improved pricing and reduced sales dilution, (ii) improving our sales and operations planning processes and our supply chain and logistics efficiency, and (iii) leveraging our overhead structure by increasing sales of our International segment. Moving into fiscal 2013, we expect our gross margins to improve an additional 85 to 110 basis points over our fiscal 2012 gross margins. We also expect that our gross margin in fiscal 2013 will be impacted by approximately 130 basis points for costs associated with the Elizabeth Arden brand repositioning and the 2012 acquisitions, which represents a year over year anticipated net impact on our gross margin of 90 basis points related to these costs.

We manage our business by evaluating net sales, EBITDA (as defined later in this discussion), EBITDA margin, segment profit and working capital utilization (including monitoring our levels of inventory, accounts receivable, operating cash flow and return on invested capital). We encounter a variety of challenges that may affect our business and should be considered as described in Item 1A "Risk Factors" of our Annual Report on Form 10-K for the year ended June 30, 2012 and in the section of this quarterly report captioned "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Cautionary Note Regarding Forward-Looking Information and Factors That May Affect Future Results."

Seasonality

Our operations have historically been seasonal, with higher sales generally occurring in the first half of our fiscal year as a result of increased demand by retailers in anticipation of and during the holiday season. For the year ended June 30, 2012, approximately 59% of our net sales were made during the first half of our fiscal year. Due to product innovation and new product launches, the size and timing of certain orders from our customers, and additions or losses of brand distribution rights, sales, results of operations, working capital requirements and cash flows can vary significantly between quarters of the same and different years. As a result, we expect to experience variability in net sales, operating margin, net income, working capital requirements and cash flows on a quarterly basis. Increased sales of skin care and cosmetic products relative to fragrances may reduce the seasonality of our business.

We experience seasonality in our working capital, with peak inventory levels normally from July to October and peak receivable balances normally from September to December. Our working capital borrowings are also seasonal and are normally highest in the months of September, October and November. During the months of December, January and February of each year, cash is normally generated as customer payments on holiday season orders are received.

Critical Accounting Policies and Estimates

As disclosed in our Annual Report on Form 10-K for the fiscal year ended June 30, 2012, the discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in conformity with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses reported in those financial statements. We base our estimates on historical experience and other factors that we believe are most likely to occur. Changes in facts and circumstances may result in revised estimates, which are recorded in the period in which they become known. Our most critical accounting policies relate to revenue recognition, provisions for inventory obsolescence, allowances for sales returns, markdowns and doubtful accounts, intangible and long-lived assets, income taxes, hedging contracts and share-based compensation. Since June 30, 2012, there have been no significant changes to the assumptions and estimates related to those critical accounting policies.

Foreign Currency Contracts

We operate in several foreign countries, which exposes us to market risk associated with foreign currency exchange rate fluctuations. Our risk management policy is to enter into cash flow hedges to reduce a portion of the exposure of our foreign subsidiaries' revenues to fluctuations in currency rates using foreign currency forward contracts. We also enter into cash flow hedges for a portion of our forecasted inventory purchases to reduce the exposure of our Canadian and Australian subsidiaries' cost of sales to such fluctuations, as well as cash flow hedges for a portion of our subsidiaries' forecasted Swiss franc operating costs. The principal currencies hedged are British pounds, Euros, Canadian dollars, Australian dollars and Swiss francs. We do not enter into derivative financial contracts for speculative or trading purposes.

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Changes to fair value of the foreign currency contracts are recorded as a component of accumulated other comprehensive income (loss) within shareholders' equity, to the extent such contracts are effective, and are recognized in net sales or cost of sales in the period in which the forecasted transaction affects earnings or the transactions are no longer probable of occurring. Changes to fair value of any contracts deemed to be ineffective would be recognized in earnings immediately. There were no amounts recorded in the three months ended September 30, 2012 or in fiscal 2012 relating to foreign currency contracts used to hedge forecasted revenues, forecasted cost of sales or forecasted operating costs resulting from hedge ineffectiveness.

When appropriate, we also enter into and settle foreign currency contracts for Euros, British pounds and Canadian dollars to reduce exposure of our foreign subsidiaries' balance sheets to fluctuations in foreign currency rates. These contracts are used to hedge balance sheet exposure generally over one month and are settled before the end of the month in which they are entered into. Changes to fair value of the forward contracts are recognized in selling, general and administrative expense in the period in which the contracts expire.

The following table summarizes the effect of the pre-tax (loss) income from our settled foreign currency contracts on the specified line items in our consolidated statements of operations for the three months ended September 30, 2012 and 2011.

      (Amounts in thousands)                       Three Months Ended

                                           September 30,         September 30,
                                               2012                  2011

      Net sales                           $            (3 )     $           (56 )
      Cost of sales                                  (138 )                (619 )
      Selling, general and administrative            (554 )               1,088

      Total pre-tax (loss) income         $          (695 )     $           413

Results of Operations

     The following discussion compares the historical results of operations for
the three months ended September 30, 2012 and 2011. Results of operations as a
percentage of net sales were as follows (dollar amounts in thousands;
percentages may not add due to rounding):

                                                              Three Months Ended

                                                     September 30,           September 30,
                                                         2012                    2011

Net sales                                        $ 344,541     100. %     $ 303,534   100.0 %
Cost of sales                                      195,611     56.8         159,755    52.6
Depreciation related to cost of goods sold           1,531      0.4           1,343     0.5
    Gross profit                                   147,399 (1) 42.8         142,436    46.9
Selling, general and administrative expenses       129,407     37.6         118,447    39.0
Depreciation and amortization                        9,129      2.6           6,718     2.2
    Income from operations                           8,863 (1)  2.6          17,271     5.7
Interest expense, net                                6,198      1.8           5,262     1.7
    Income before income taxes                       2,665      0.8          12,009     4.0
Provision for income taxes                             481      0.2           2,777     0.9
    Net income                                       2,184      0.6           9,232     3.1

Other data
EBITDA and EBITDA margin (2)                     $  19,523      5.7 %     $  25,332     8.3 %

(1) For the three months ended September 30, 2012, gross profit and income from operations include $11.3 million of inventory-related costs primarily for inventory purchased by us from New Wave Fragrances LLC and Give Back Brands LLC prior to the acquisition of licenses and certain other assets from those companies and other transition costs, and $3.4 million of non-recurring product changeover costs related to the repositioning of the Elizabeth Arden brand. In addition, income from operations includes $0.3 million in transition costs associated with the 2012 acquisitions and $0.1 million of non-recurring product changeover expenses related to the repositioning of the Elizabeth Arden brand.

(2) For a definition of EBITDA and a reconciliation of net income to EBITDA, see "EBITDA" under Results of Operations -- Three Months Ended September 30, 2012 Compared to Three Months Ended September 30, 2011. EBITDA margin represents EBITDA divided by net sales.

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Our operations are organized into the following two operating segments, which also comprise our reportable segments:

- North America - Our North America segment sells our portfolio of owned, licensed and distributed brands, including the Elizabeth Arden products, to department stores, mass retailers and distributors in the United States, Canada and Puerto Rico, and also includes the Company's direct to consumer business, which is composed of our Elizabeth Arden branded retail outlet stores and global e-commerce business. This segment also sells the Elizabeth Arden products through the Red Door beauty salons and spas, which are owned and operated by a third party, in which we have a minority investment, that licenses the Elizabeth Arden and Red Door trademarks from us for use in its salons and spas.

- International - Our International segment sells our portfolio of owned and licensed brands, including our Elizabeth Arden products, to perfumeries, boutiques, department stores, travel retail outlets and distributors in approximately 120 countries outside of North America.

Segment profit excludes depreciation and amortization, interest expense, consolidation and elimination adjustments and unallocated corporate expenses, which are shown in the table reconciling segment profit to consolidated income before income taxes. Included in unallocated corporate expenses are (i) restructuring charges that are related to an announced plan, (ii) restructuring costs for corporate operations and (iii) acquisition-related costs including transition costs. These expenses are recorded in unallocated corporate expenses as these items are centrally directed and controlled and are not included in internal measures of segment operating performance. We do not have any intersegment sales.

The following table is a comparative summary of our net sales and segment profit (loss) by operating segment for the three months ended September 30, 2012 and 2011 and reflects the basis of presentation described in Note 13 -- "Segment Data and Related Information" to the Notes to Unaudited Consolidated Financial Statements for all periods presented.

(Amounts in thousands)                                      Three Months Ended

                                                     September 30,       September 30,
                                                         2012                2011

Segment Net Sales:
  North America                                      $     231,557       $     192,966
  International                                            112,984             110,568

Total                                                $     344,541       $     303,534

Segment Profit (Loss):
  North America                                      $      36,808       $      30,350
  International                                             (5,238 )            (4,296 )
  Less:
    Depreciation and Amortization                           10,660               8,061
    Interest Expense, net                                    6,198               5,262
    Consolidation and Elimination Adjustments                  453                 722
    Unallocated Corporate Expenses                          11,594 (1)              --

Income Before Income Taxes                           $       2,665       $      12,009

(1) Amounts for the three months ended September 30, 2012, include $11.3 million of inventory-related costs recorded in cost of sales primarily for inventory purchased by us from New Wave Fragrances LLC and Give Back Brands LLC prior to the acquisition of licenses and certain other assets from those companies, and other transition costs. In addition, included in selling, general and administrative expenses are $0.3 million in transition expenses associated with such acquisitions.

In light of the repositioning of the Elizabeth Arden brand commencing in fiscal 2013, we are providing the following additional financial information relating to the following product categories: the Elizabeth Arden Brand (skin care, cosmetics and fragrances) and Celebrity, Lifestyle, Designer and Other Fragrances.

(Amounts in thousands)                                         Three Months Ended

                                                       September 30,         September 30,
                                                           2012                  2011

Net Sales:
  Elizabeth Arden Brand                               $       108,480 (1)   $       114,298
  Celebrity, Lifestyle, Designer and Other Fragrances         236,061               189,236

Total                                                 $       344,541       $       303,534

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Three Months Ended September 30, 2012 Compared to Three Months Ended September 30, 2011.

Net Sales. Net sales increased by 13.5%, or $41.0 million, for the three months ended September 30, 2012, compared to the three months ended September 30, 2011. Excluding the unfavorable impact of foreign currency, net sales increased by 16.1%, or $48.9 million. Pricing changes had an immaterial effect on net sales. The following is a discussion of net sales by segments and product categories.

Segment Net Sales:

North America

Net sales increased by 20.0%, or $38.6 million. The impact of foreign currency was not material. Net sales of licensed and non-Elizabeth Arden branded products increased by $43.0 million and include sales of brands we acquired from New Wave Fragrances LLC and Give Back Brands LLC in the fourth quarter of the prior fiscal year, which we had distributed prior to the acquisitions. The increase in net sales of licensed and non-Elizabeth Arden branded products includes higher net sales of $21.4 million of the acquired brands. Additionally, net sales of licensed and non-Elizabeth Arden branded products increased $13.5 million due to the launches of Justin Bieber's Girlfriend, Pink Friday Nicki Minaj and Ed Hardy Skull & Roses fragrances, and $18.1 million from higher sales of the Taylor Swift, Viva La Juicy and Curve fragrances. Partially offsetting these increases were lower sales of John Varvatos and Mariah Carey fragrances, as well as lower sales of other Juicy Couture fragrances, primarily Peace, Love & Juicy Couture. Net sales for Elizabeth Arden branded products decreased by $3.3 million, due to lower sales of skin care products primarily due to our continued wind down of retailer inventory in advance of the broader roll-out of the repositioning of the Elizabeth Arden brand. Net sales of distributed brands were $1.2 million lower than the prior year period.

International

Net sales increased by 2.2%, or $2.4 million. Excluding the unfavorable impact of foreign currency, net sales increased by 8.9%, or $9.8 million. Net sales of licensed and non-Elizabeth Arden branded products increased by $4.9 million primarily due to higher sales of Justin Bieber, Taylor Swift and John Varvatos fragrances in Europe and distributor markets. Partially offsetting these increases were lower sales of Britney Spears fragrances. Net sales for Elizabeth Arden branded products decreased by $2.6 million, due to lower sales of skin care and color cosmetic products primarily due to our continued wind down of retailer inventory in advance of the broader roll-out of the repositioning of the Elizabeth Arden brand, partially offset by higher fragrance sales. Our international results were led by higher net sales of $3.1 million in Europe and $2.2 million in distributor markets.

Product Category Net Sales:

Elizabeth Arden Brand

Net sales decreased by 5.1%, or $5.8 million, due to lower sales for skin care and color cosmetic products, partially offset by higher fragrance sales. Excluding the unfavorable impact of foreign currency, net sales decreased by 0.9%, or $1.0 million. Net sales for skin care products and color cosmetic products decreased by 9.7%, or $5.2 million and 15.5%, or $2.7 million, respectively, primarily due to our continued wind down of retailer inventory in advance of the broader roll-out of the repositioning of the Elizabeth Arden brand. Net sales of fragrances increased 4.8%, or $2.1 million, led by higher sales of Red Door fragrances.

Celebrity, Lifestyle, Designer and Other Fragrances

Net sales increased by 24.7%, or $46.8 million. Excluding the unfavorable impact of foreign currency, net sales increased by 26.4%, or $49.9 million. The increase in net sales includes higher net sales of $26.7 million of brands acquired as part of the 2012 acquisitions. Additionally, net sales increased (i) $16.1 million due to the launches of Justin Bieber's Girlfriend, Pink Friday Nicki Minaj and Ed Hardy Skull & Roses fragrances, (ii) $19.8 million from the sale of the Taylor Swift fragrances and Viva La Juicy, and (iii) $3.0 million from higher net sales of Curve fragrances. Partially offsetting these increases were lower sales of $9.8 million for other Juicy Couture fragrances, primarily Peace, Love & Juicy Couture, Britney Spears and Mariah Carey fragrances.

Gross Margin. For the three months ended September 30, 2012 and 2011, gross margins were 42.8% and 46.9%, respectively. Gross margin in the current year period was negatively impacted by $14.7 million, or 430 basis points, of inventory-related costs associated with the 2012 acquisitions and product changeover costs associated with the Elizabeth Arden brand repositioning.

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SG&A. Selling, general and administrative expenses increased 9.3%, or $11.0 million, for the three months ended September 30, 2012, compared to the three months ended September 30, 2011. The increase was due to higher marketing and sales expenses of $14.8 million, partially offset by lower general and administrative expenses of $3.8 million. The increase in marketing and sales expenses was primarily due to higher advertising, media and sales promotion expenses due to higher spend in support of the recently acquired brands and current fiscal year fragrance launches, higher marketing expenses related to the Elizabeth Arden brand repositioning, and higher royalty expenses due to increased sales of licensed brands. The decrease in general and administrative expenses was principally due to the impact of foreign currency translation of our affiliates' balance sheets as the current year included losses of $0.1 million compared to losses of $2.0 million in the prior year period, and lower payroll-related costs of $1.1 million. The three months ended September 30, 2012 also included $0.3 million of transition costs for the 2012 acquisitions and $0.1 million of product changeover expenses related to the Elizabeth Arden brand repositioning. For the three months ended September 30, 2012 and 2011, total share-based compensation costs charged against income for all stock plans was $1.4 million and $1.2 million, respectively.

Segment Profit (Loss).

North America

Segment profit increased 21.3%, or $6.5 million, as compared to the prior year. The increase in segment profit was due to higher sales and gross profit, partially offset by higher selling, general and administrative expenses.

International

Segment loss increased by $0.9 million as compared to the prior year. The increase in segment loss was primarily due to the Elizabeth Arden brand repositioning costs.

Depreciation and Amortization Expense. Depreciation and amortization expense increased by 35.9% or $2.4 million, for the three months ended September 30, 2012, compared to the three months ended September 30, 2011, primarily due to higher amortization expense related to the 2012 acquisitions.

Interest Expense, Net. Interest expense, net of interest income, was $0.9 million higher for the three months ended September 30, 2012, compared to the three months ended September 30, 2011. The increase was due to higher average borrowings under our revolving bank credit facility during the current year period driven by the 2012 acquisitions and interest on our second lien credit . . .

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