Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
PERY > SEC Filings for PERY > Form 10-Q on 11-Jun-2013All Recent SEC Filings

Show all filings for PERRY ELLIS INTERNATIONAL INC | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for PERRY ELLIS INTERNATIONAL INC


11-Jun-2013

Quarterly Report


Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations

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 February 2, 2013, filed with the Securities and Exchange Commission on April 16, 2013.

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," "believe," "budget," "contemplate," "continue," "could," "envision," "estimate," "expect," "guidance," "indicate," "intend," "may," "might," "plan," "possibly," "potential," "predict," "probably," "pro-forma," "project," "seek," "should," "target," or "will" or the negative thereof or other variations thereon and similar words or phrases or comparable 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 future 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 protect our trademarks,

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,


Table of Contents
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 that all forward-looking statements involve risks and uncertainties, detailed in our filings with the SEC. 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 February 2, 2013 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 in which 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 and goodwill, and the measurement of retirement related benefits. We believe that there have been no significant changes to our critical accounting policies during the three months ended May 4, 2013 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 February 2, 2013.


Table of Contents

Results of Operations

The following table sets forth, for the periods indicated, selected financial
data expressed by segments and includes a reconciliation of EBITDA to operating
income by segment, the most directly comparable GAAP financial measure:



                                                Three Months Ended
                                              May 4,       April 28,
                                               2013           2012
                                                  (in thousands)
                 Revenues by segment:
                 Men's Sportswear and Swim   $ 198,677     $  198,362
                 Women's Sportswear             39,794         42,402
                 Direct-to-Consumer             17,013         18,252
                 Licensing                       6,835          6,507

                 Total revenues              $ 262,319     $  265,523

                                                        Three Months Ended
                                                     May 4,         April 28,
                                                      2013            2012
     Reconciliation of operating income to EBITDA
     Operating income (loss) by segment:
     Men's Sportswear and Swim                      $ 11,241       $    13,217
     Women's Sportswear                                1,563             1,136
     Direct-to-Consumer                               (2,853 )          (1,740 )
     Licensing                                        11,539             5,362

     Total operating income                         $ 21,490       $    17,975

     Add:
     Depreciation and amortization
     Men's Sportswear and Swim                         1,694             2,122
     Women's Sportswear                                  400               461
     Direct-to-Consumer                                  661               724
     Licensing                                            37               111

     Total depreciation and amortization               2,792             3,418

     EBITDA by segment:
     Men's Sportswear and Swim                      $ 12,935       $    15,339
     Women's Sportswear                                1,963             1,597
     Direct-to-Consumer                               (2,192 )          (1,016 )
     Licensing                                        11,576             5,473

     Total EBITDA                                   $ 24,282       $    21,393

     EBITDA margin by segment
     Men's Sportswear and Swim                           6.5 %             7.7 %
     Women's Sportswear                                  4.9 %             3.8 %
     Direct-to-Consumer                                (12.9 %)           (5.6 %)
     Licensing                                         169.4 %            84.1 %
     Total EBITDA margin                                 9.3 %             8.1 %

EBITDA consists of earnings before interest, depreciation and amortization and income taxes. EBITDA is not a measurement of financial performance under accounting principles generally accepted in the United States of America, and does not represent cash flow from operations. The most directly comparable GAAP financial measure, presented above, is operating income. EBITDA and EBITDA margin are presented solely as a supplemental disclosure because management believes that they are a common measure of operating performance in the apparel industry.


Table of Contents

The following is a discussion of the results of operations for the three month period in the first quarter of the fiscal year ending February 1, 2014 ("fiscal 2014") compared with the three month period in the first quarter of the fiscal year ended February 2, 2013 ("fiscal 2013").

Results of Operations-three months ended May 4, 2013 compared to the three months ended April 28, 2012.

Net sales. Men's Sportswear and Swim net sales for the three months ended May 4, 2013 were $198.7 million, an increase of $0.3 million, or 0.2%, from $198.4 million for the three months ended April 28, 2012. The net sales increase was attributed primarily to increases across our golf sportswear brands, as well as spring shipments of Ben Hogan, offset by a decrease in our private label bottoms programs.

Women's Sportswear net sales for the three months ended May 4, 2013 were $39.8 million, a decrease of $2.6 million, or 6.1%, from $42.4 million for the three months ended April 28, 2012. The net sales decrease was primarily due to decreases in our contemporary Laundry dress business.

Direct-to-Consumer net sales for the three months ended May 4, 2013 were $17.0 million, a decrease of $1.3 million, or 7.1%, from $18.3 million for the three months ended April 28, 2012. The decrease was driven by lower traffic patterns in our stores influenced by macroeconomic factors, such as the northeast weather and economic weakness. Additionally, ecommerce sales were down 27% from last year due to the rollout of a less promotional strategy across our sites.

Royalty income. Royalty income for the three months ended May 4, 2013 was $6.8 million, an increase of $0.3 million, or 4.6%, from $6.5 million for the three months ended April 28, 2012. Royalty income increases were attributed to our increases in our Original Penguin, Perry Ellis and contemporary Laundry businesses.

Gross profit. Gross profit was $88.7 million for the three months ended May 4, 2013, an increase of $1.0 million, or 1.1 %, from $87.7 million for the three months ended April 28, 2012. This increase is attributed to the sales mix composition described above and the factors described within the gross profit margin section below.

Gross profit margin. As a percentage of total revenue, gross profit margins were 33.8% for the three months ended May 4, 2013, as compared to 33.0% for the three months ended April 28, 2012, an increase of 80 basis points. This increase is primarily associated with higher margins in our golf lifestyle apparel, as well as our Rafaella collection sportswear business.

Selling, general and administrative expenses. Selling, general and administrative expenses for the three months ended May 4, 2013 were $70.7 million, an increase of $4.4 million, or 6.6%, from $66.3 million for the three months ended April 28, 2012. The increase was in line with our expectations and was primarily attributed to additional investment in brand marketing, ecommerce photography, and other infrastructure spends. Also, we experienced costs in the amount of $1.2 million related to our relocation of our New York offices and $0.8 million in costs associated with the sale of the Asian rights of the John Henry trademark.

EBITDA. Men's Sportswear and Swim EBITDA margin for the three months ended May 4, 2013 decreased 120 basis points to 6.5%, from 7.7% for the three months ended April 28, 2012. The EBITDA margin was negatively impacted by reduced leverage from the increased infrastructure expenditures planned in this segment. The margin was also negatively impacted by costs associated with our relocation of our New York offices.

Women's Sportswear EBITDA margin for the three months ended May 4, 2013 increased 110 basis points to 4.9%, from 3.8% for the three months ended April 28, 2012. The margin was positively impacted by the in increase in gross margin in Rafaella sportswear, as well as Laundry. The margin increase was negatively impacted by costs associated with our relocation of our New York offices.

Direct-to-Consumer EBITDA margin for the three months ended May 4, 2013 decreased 730 basis points to (12.9%), from (5.6%) for the three months ended April 28, 2012. The decrease was primarily attributable to the reduction of revenue from our stores and ecommerce business, as described above. Because of the reduction in revenue, we were not able to realize a favorable leverage in selling, general and administrative expenses.

Licensing EBITDA margin for the three months ended May 4, 2013 increased 8,530 basis points to 169.4%, from 84.1% for the three months ended April 28, 2012. This increase was primarily attributed to the gain on sale of the Asian rights of the John Henry brand as described below.


Table of Contents

Depreciation and amortization. Depreciation and amortization for the three months ended May 4, 2013, was $2.8 million, a decrease of $0.6 million, or 17.6%, from $3.4 million for the three months ended April 28, 2012. The decrease is attributed to the reduction in depreciation associated with the impairments of long-lived assets taken during the fourth quarter of fiscal 2013, offset by the increases in depreciation related to our capital expenditures, primarily in the direct-to-consumer segment.

Gain on sale of long-lived assets. During the fourth quarter of fiscal 2013, we entered into a sales agreement, in the amount of $7.5 million, for certain Asian trademark rights with respect our John Henry brand. The transaction closed in the first quarter of fiscal 2014. As a result of this transaction, we recorded a gain of $6.3 million. This gain was included in our licensing segment's operating income. We plan to continue to execute our domestic strategy for the John Henry brand as a modern lifestyle resource to select retailers as well as its licensing relationships in Latin America.

Interest expense. Interest expense remained flat at $3.8 million for the three months ended May 4, 2013 and April 28, 2012, respectively.

Income taxes. The income tax expense for the three months ended May 4, 2013, was $6.4 million, an increase of $1.9 million, as compared to $4.5 million for the three months ended April 28, 2012. For the three months ended May 4, 2013, our effective tax rate was 36.0% as compared to 31.7% for the three months ended April 28, 2012. The overall increase in the effective tax rate is attributed to the unfavorable disallowance of executive compensation and the sale of certain intangible rights of the John Henry trademark as well as the change in ratio of income between domestic and foreign operations, of which the domestic operations are taxed at higher statutory tax rates.

Net income. Net income for the three months ended May 4, 2013 was $11.3 million, an increase of $1.6 million, or 16.5%, as compared to $9.7 million for the three months ended April 28, 2012. The changes in operating results were due to the items described above.

Liquidity and Capital Resources

We rely principally on cash flow from operations and borrowings under our senior credit facility to finance our operations, acquisitions and capital expenditures; and to a lesser extent, on letter of credit facilities for the acquisition of a small portion of our inventory purchases. We believe that our working capital requirements will decrease for fiscal 2014 driven primarily by lower levels of inventory. As of May 4, 2013, our total working capital was $290.7 million as compared to $273.8 million as of February 2, 2013 and $299.6 million as of April 28, 2012. 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. We also believe that our real estate assets, which had a net book value of $23.5 million at May 4, 2013, have a higher market value. These real estate assets may provide us with additional capital resources. Additional borrowings against these real estate assets, however, would be subject to certain loan to value criteria established by lending institutions. As of May 4, 2013, we had mortgage loans on these properties totaling $24.8 million.

We consider the undistributed earnings of our foreign subsidiaries as of May 4, 2013, to be indefinitely reinvested and, accordingly, no U.S. income taxes have been provided thereon. As of May 4, 2013, the amount of cash associated with indefinitely reinvested foreign earnings was approximately $43.2 million. We have not, nor do we anticipate the need to, repatriate funds to the United States to satisfy domestic liquidity needs arising in the ordinary course of business, including liquidity needs associated with our domestic debt service requirements.

Net cash used in operating activities was $14.2 million for the three months ended May 4, 2013, as compared to cash provided by operating activities of $6.7 million for the three months ended April 28, 2012.

The cash used in operating activities for three months ended May 4, 2013, is primarily attributable to a decrease in accounts payable and accrued expenses of $42.2 million, a decrease in accrued interest payable of $3.0 million; which was partially offset by a decrease in inventory of $14.8 million associated with strong inventory management. As a result of the decrease in inventory for the first quarter of fiscal 2014, our inventory turnover ratio increased to 3.9 as compared to 3.3 for the comparable quarter in fiscal 2013.


Table of Contents

The cash provided by operating activities for three months ended April 28, 2012 is primarily attributable to a decrease in inventory of $31.6 million associated with inventory management; which was partially offset by an increase in accounts receivable of $29.5 million due to the increase in sales toward the end of the first quarter, and a reduction of our accounts payable and accrued expenses of $7.7 million. As a result of the decrease in inventory for the first quarter of fiscal 2013, our inventory turnover ratio decreased to 3.3 as compared to 3.7 for the comparable quarter in fiscal 2012.

Net cash used in investing activities was $2.3 million for the three months ended May 4, 2013, as compared to cash used in investing activities of $3.8 million for the three months ended April 28, 2012. The net cash used during the first three months of fiscal 2014 primarily reflects the purchase of property and equipment of $7.2 million, primarily for leaseholds; which was partially offset by proceeds on the sale of certain Asian trademark rights with respect to John Henry of $4.9 million. The net cash used during the first three months of fiscal 2013 primarily reflects the purchase of Ben Hogan in the amount of $7.0 million and the purchase of property and equipment in the amount of $1.3 million; which was partially offset by the proceeds related to the Rafaella purchase price adjustment of $4.5 million.

Net cash provided by financing activities was $7.4 million for the three months ended May 4, 2013, as compared to the cash provided by financing activities of $1.4 million for the three months ended April 28, 2012. The net cash provided during the first three months of fiscal 2014 primarily reflects net borrowings on our senior credit facility of $7.7 million; which was partially offset by payments of $0.2 million on our mortgage loans. The net cash provided during the first three months of fiscal 2013 primarily reflects net borrowings on our senior credit facility of $1.5 million, proceeds from exercises of stock options of $0.1 million and a tax benefit from the exercise of stock options of $0.1 million; which was partially offset by payments of $0.2 million on our mortgage loans.

Our Board of Directors authorized us to purchase, from time to time and as market and business conditions warranted, up to $60 million of our common stock for cash in the open market or in privately negotiated transactions through October 31, 2013. Although our Board of Directors allocated a maximum of $60 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. Total purchases under the plan to date amount to $36.0 million.

During January 2013, we retired 1,290,022 shares of treasury stock recorded at a cost of approximately $18.5 million. Accordingly, during fiscal 2013, we reduced common stock and additional paid-in-capital by $13,000 and $18.5 million, respectively. We repurchased shares of our common stock during fiscal 2013 at a cost of $2.6 million. No purchases have been made during fiscal 2014.

Acquisitions

Acquisition of Ben Hogan

On February 16, 2012, we acquired the world-wide intellectual property rights of the Ben Hogan family of brands from Callaway Golf Company for a purchase price of $7.0 million. The acquisition was financed through existing cash and borrowings under our existing senior credit facility. Ben Hogan brands are ideally positioned to strengthen our golf business within the Men's Sportswear and Swim segment.

The assets acquired were comprised of tradenames, which have been identified as indefinite useful life assets, and are not subject to amortization.

7 7/8% $150 Million Senior Subordinated Notes Payable

In March 2011, we issued $150 million 7 7/8% senior subordinated notes, due April 1, 2019. The proceeds of this offering were used to retire the $150 million 8 7/8% senior subordinated notes due September 15, 2013 and to repay a portion of the outstanding balance on the senior credit facility. The proceeds to us were $146.5 million yielding an effective interest rate of 8.0%.

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, pay dividends or make other distributions on, redeem or repurchase capital stock, make investments or other restricted payments, create liens on assets to secure debt, engage in transactions with affiliates, and effect a consolidation or merger. We are not aware of any non-compliance with any of our covenants in this indenture. 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 mortgages resulting in all of our debt obligations becoming immediately due and payable, which we may not be able to satisfy.


Table of Contents

Senior Credit Facility

On December 2, 2011, we amended and restated our existing senior credit facility (the "Credit Facility"), with Wells Fargo Bank, National Association, as agent for the lenders, and Bank of America, N.A., as syndication agent. The Credit Facility provides a revolving credit facility of up to an aggregate amount of $125 million, subject to increases from time to time in increments of $25 million up to a maximum of $200 million. The Credit Facility has a five-year term that expires on December 2, 2016. At May 4, 2013, we had outstanding borrowings of $7.7 million and at February 2, 2013, we had no outstanding borrowings under the Credit Facility.

Certain Covenants. The Credit Facility contains certain financial and other covenants, which, among other things, require us to maintain a minimum fixed charge coverage ratio if availability falls below certain thresholds. We are not aware of any non-compliance with any of our covenants in this Credit Facility. These covenants may restrict our ability and the ability of our subsidiaries to, among other things, incur additional indebtedness and liens in certain circumstances, redeem or repurchase capital stock, make certain investments or sell assets. We may pay cash dividends subject to certain restrictions set forth in the covenants including, but not limited to, meeting a minimum excess availability threshold and no occurrence of a default. We could be materially harmed if we violate any covenants, as the lenders under the Credit Facility could declare all amounts outstanding, 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 and the assets of our subsidiaries that are borrowers or guarantors. In addition, a covenant violation that is not cured or waived by the lenders could also constitute a cross-default under certain of our other outstanding indebtedness, such as the indenture relating to our 7 7/8% senior subordinated notes due April 1, 2019, our letter of credit facilities, or our real estate mortgage loans. Such a cross-default could result in all of our debt obligations becoming immediately due and payable, which we may not be able to satisfy.

Borrowing Base. Borrowings under the Credit Facility are limited to a borrowing base calculation, which generally restricts the outstanding balance to the sum of (a) 87.5% of eligible receivables, plus (b) 87.5% of eligible foreign accounts up to $1.5 million, plus (c) the lesser of (i) the inventory loan limit, which equals 80% of the maximum credit under the Credit Facility at the time, (ii) a maximum of 70.0% of eligible finished goods inventory, or
(iii) 90.0% of the net recovery percentage (as defined in the Credit Facility) of eligible inventory.

Interest. Interest on the outstanding principal balance drawn under the Credit Facility accrues, at our option, at either (a) the greater of the agent's prime lending rate plus a margin of 1.25% per year through March 31, 2012, provided such margin shall be adjusted quarterly thereafter, or the Federal Funds rate in effect on such day plus one half of one percent (.50%); or (b) the rate quoted by the agent as the Eurodollar Rate for one-, two- or three-month Eurodollar deposits, as selected by us, plus a margin of 2.25% per year through March 31, 2012. Thereafter, the margin adjusts quarterly, in a range of 1.75% to 2.50%, based on our previous quarterly average of excess availability plus excess cash on the last day of the previous quarter.

Security. As security for the indebtedness under the Credit Facility, we granted to the lenders a first priority security interest (subject to liens permitted under the Credit Facility to be senior thereto) in substantially all of our existing and future assets, 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, and real . . .

  Add PERY to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for PERY - All Recent SEC Filings
Sign Up for a Free Trial to the NEW EDGAR Online Pro
Detailed SEC, Financial, Ownership and Offering Data on over 12,000 U.S. Public Companies.
Actionable and easy-to-use with searching, alerting, downloading and more.
Request a Trial Sign Up Now


Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.