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RDEN > SEC Filings for RDEN > Form 10-Q on 3-May-2013All Recent SEC Filings

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Form 10-Q for ELIZABETH ARDEN INC


3-May-2013

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 and True Religion 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. Through the nine months ended March 31, 2013, we have incurred pre-tax transition and other expenses related to the New Wave LLC and Give Back Brands LLC acquisitions in fiscal 2013 of approximately $14.2 million ($6.4 million of which did not require the use of cash in the current fiscal year), and no additional such expenses are expected to be recorded during the remainder of fiscal 2013. These expenses primarily result from inventory purchased by us at a higher cost prior to the acquisitions, and other non-recurring expenses.

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 are in the process 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 a revised product assortment, improved product formulations, package redesign, counter redesign, new advertising and marketing vehicles, and enhanced beauty advisor support. The initial roll-out was limited to a number of flagship retail doors. We began shipping the new product assortment to retailers in June 2012 and replaced most of such flagship retail counters with the new counters during the second quarter of fiscal 2013. During the remainder of fiscal 2013, we plan to substantially complete the process of introducing our new product assortment to our prestige retail customers, and to also extend elements of the new advertising, marketing and beauty advisor programs to the next tier of approximately 200 retail doors globally. We expect to extend elements of the new advertising, marketing and beauty advisor programs to additional retail doors beyond fiscal 2013. Based on

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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. Through the nine months ended March 31, 2013, we have incurred pre-tax non-recurring charges of $10.2 million associated with the Elizabeth Arden brand repositioning resulting from product assortment changes, and we currently expect to incur an additional $1.5 million of such costs in the fourth quarter of fiscal 2013.

In September, 2012, we invested $5.5 million, including transaction costs, for a minority investment in Elizabeth Arden Salon Holdings, LLC, an unrelated entity whose subsidiaries operate the Elizabeth Arden Red Door Spas and the Mario Tricoci Hair Salons. In November 2012, we invested an additional $2.1 million. 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 March 31, 2013, is included in other assets on our unaudited consolidated balance sheet. Under the terms of the agreement with Salon Holdings, we expect to invest an additional $2.1 million in fiscal 2014.

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. For fiscal 2013, we expect our gross margins to be approximately 130 to 170 basis points below our fiscal 2012 gross margins, including an estimated negative impact of 190 basis points for costs associated with the Elizabeth Arden brand repositioning and the 2012 acquisitions. This 190 basis point gross margin impact represents a year over year increase of 150 basis points relating 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.

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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 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.

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 and nine months ended March 31, 2013 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 foreign currency contracts are recognized in selling, general and administrative expense in the period in which the contracts expire.

The table below summarizes the effect of the pre-tax gain (loss) from our settled foreign currency contracts on the specified line items in our consolidated statements of income for the three and nine months ended March 31, 2013 and 2012.

(Amounts in thousands)               Three Months Ended                  Nine Months Ended

                                March 31,          March 31,        March 31,         March 31,
                                   2013              2012              2013              2012

  Net Sales                    $         30       $       113      $       (160 )    $        180
  Cost of Sales                         (37 )            (342 )            (388 )          (1,140 )
  Selling, general and
administrative                          778              (580 )              36                 3

Total pre-tax gain (loss)      $        771       $      (809 )    $       (512 )    $       (957 )

American Taxpayer Relief Act of 2012

On January 2, 2013, the American Taxpayer Relief Act of 2012 was signed into law by the President of the United States. Under the provisions of the American Taxpayer Relief Act of 2012, the research and development tax credit that had expired December 31, 2011, was reinstated retroactively to January 1, 2012, and is now scheduled to expire on December 31, 2013. We were required to record the impact of the extension of the research and development tax credit in the fiscal quarter beginning January 1, 2013. The impact of the extension of such tax credit is expected to result in a net tax benefit of approximately $0.5 million for the fiscal year ending June 30, 2013, of which $0.2 million was recorded as a discrete item in the third quarter of fiscal 2013.

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Results of Operations

     The following discussion compares the historical results of operations for
the three and nine months ended March 31, 2013 and 2012. 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                              Nine Months Ended

                                        March 31,                March 31,               March 31,              March 31,
                                           2013                     2012                   2013                   2012

Net sales                         $  264,484    100.0 %     $  239,279   100.0 %   $ 1,076,944   100.0 %   $ 972,739   100.0 %
Cost of sales                        136,643     51.7          118,781    49.6         562,220    52.2       489,548    50.3
Depreciation in cost of sales          1,656      0.6              906     0.4           4,674     0.4         3,850     0.4
      Gross profit (1)               126,185     47.7          119,592    50.0         510,050    47.4       479,341    49.3
Selling, general and
administrative
  expenses                           111,597     42.2          104,582    43.7         404,257    37.6       371,480    38.2
Depreciation and amortization         10,254      3.9            7,645     3.2          28,755     2.7        21,433     2.2
      Income from operations
      (1)                              4,334      1.6            7,365     3.1          77,038     7.1        86,428     8.9
Interest expense, net                  5,893      2.2            5,291     2.2          18,515     1.7        16,339     1.7
      (Loss) income before
      income taxes                    (1,559 )   (0.6 )          2,074     0.9          58,523     5.4        70,089     7.2
(Benefit from) provision for
income
  taxes                                 (286 )     --             (117 )    --          12,803     1.2        16,295     1.7
      Net (loss) income               (1,273 )   (0.5 )          2,191     0.9          45,720     4.2        53,794     5.5

Other data
EBITDA and EBITDA margin (2)      $   16,244      6.1 %     $   15,916     6.7 %   $   110,467    10.3 %   $ 111,711    11.5 %

(1)              For the three months ended March 31, 2013, gross profit includes $0.6 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 $2.8
                 million of non-recurring product changeover costs related to the repositioning of the Elizabeth Arden brand.
                 In addition, income from operations includes $0.1 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 that were recorded in selling, general and administrative expenses. For the nine
                 months ended March 31, 2013, gross profit includes $13.8 million of inventory-related costs ($6.4 million of
                 which did not require the use of cash in the current period) 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 $9.7 million of non-recurring product changeover costs
                 related to the repositioning of the Elizabeth Arden brand. In addition, income from operations includes $0.4
                 million in transition costs associated with the 2012 acquisitions and $0.5 million of non-recurring product
                 changeover expenses related to the repositioning of the Elizabeth Arden brand that were recorded in selling,
                 general and administrative expenses.

(2)              For a definition of EBITDA and a reconciliation of net income (loss) to EBITDA, see "EBITDA" under Results of
                 Operations -- Three Months Ended March 31, 2013 Compared to Three Months Ended March 31, 2012 and under Nine
                 Months Ended March 31, 2013 compared to Nine Months Ended March 31, 2012. EBITDA margin represents EBITDA
                 divided by net sales.


     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.

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Segment profit (loss) 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 and nine months ended March 31, 2013 and 2012 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                        Nine Months Ended

                                       March 31,               March 31,            March 31,         March 31,
                                          2013                    2012                2013              2012

Segment Net Sales:
  North America                      $      158,746         $        145,154       $   701,380       $   625,215
  International                             105,738                   94,125           375,564           347,524

Total                                $      264,484         $        239,279       $ 1,076,944       $   972,739

Segment Profit (Loss):
  North America                      $       20,998         $         20,818       $   111,348       $   105,133
  International                              (4,200 )                 (4,932 )          14,070             8,975
  Less:
    Depreciation and Amortization            11,910                    8,551            33,429            25,283
    Interest Expense, net                     5,893                    5,291            18,515            16,339
    Consolidation and Elimination
      Adjustments                              (142 )                    (30 )             726             2,397
    Unallocated Corporate Expenses
(1)                                             696 (1)                   --            14,225 (2)            --

Income Before Income Taxes           $       (1,559 )       $          2,074       $    58,523       $    70,089

(1)               Amounts for the three months ended March 31, 2013, include $0.6 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 other assets from those
                  companies, and other transition costs. An additional $0.1 million in transition expenses
                  associated with such acquisitions were recorded in selling, general and administrative expenses.

(2)               Amounts for the nine months ended March 31, 2013, include $13.8 million of inventory-related
                  costs ($6.4 million of which did not require the use of cash in the current period) 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 other assets from those companies, and other
                  transition costs. In addition, included in selling, general and administrative expenses are $0.4
                  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 net sales 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                Nine Months Ended

                               March 31,        March 31,        March 31,        March 31,
                                 2013             2012             2013             2012

Net Sales:
  Elizabeth Arden Brand       $   106,239      $   106,082      $   362,675      $   363,948
  Celebrity, Lifestyle,
Designer and Other
    Fragrances                    158,245          133,197          714,269          608,791

Total                         $   264,484      $   239,279      $ 1,076,944      $   972,739

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Three Months Ended March 31, 2013 Compared to Three Months Ended March 31, 2012

Net Sales. Net sales increased by 10.5%, or $25.2 million, for the three months ended March 31, 2013, compared to the three months ended March 31, 2012. Excluding the unfavorable impact of foreign currency, net sales increased by 11.2%, or $26.9 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 9.4%, or $13.6 million. The impact of foreign currency was not material. Net sales of licensed and non-Elizabeth Arden branded products increased by $16.6 million. The increase includes higher net sales of $10.8 million of the brands acquired in the 2012 acquisitions and $9.8 million due to the launches of Pink Friday Nicki Minaj, Justin Bieber's Girlfriend and Ed Hardy Skull & Roses fragrances. Partially offsetting these increases were lower sales of Britney Spears fragrances. Net sales for Elizabeth Arden branded products increased by $1.0 million, due to higher net sales of color cosmetic products. Net sales of distributed brands were $4.1 million lower than the prior year period.

International

Net sales increased by 12.3%, or $11.6 million. Excluding the unfavorable impact of foreign currency, net sales increased by 13.9%, or $13.0 million. Net sales of licensed and non-Elizabeth Arden branded products increased an aggregate of $13.3 million primarily due to higher sales of Britney Spears, Justin Bieber and Nicki Minaj fragrances. Net sales for Elizabeth Arden branded products decreased by $0.9 million, due to lower sales of fragrance products, partially offset by higher sales of color cosmetic and skin care products. Our international results were led by higher net sales of $6.8 million in Europe and $3.9 million in distributor markets.

Product Category Net Sales:

Elizabeth Arden Brand

Net sales were relatively flat as higher sales of color cosmetic products were primarily offset by lower sales of fragrances. Excluding the unfavorable impact of foreign currency, net sales increased by 0.7%, or $0.7 million. Net sales for color cosmetic products increased by 17.3%, or $2.7 million and net sales of fragrances decreased 5.1%, or $2.1 million.

Celebrity, Lifestyle, Designer and Other Fragrances

Net sales increased by 18.8%, or $25.0 million. Excluding the unfavorable . . .

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