This summary is based on the second quarter fiscal 2008 earnings call conducted by Kenneth Cole Productions Inc. (KCP) on August 5, 2008.
Management:
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Chairman and Chief Creative Officer: Kenneth D. Cole
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Chief Executive Officer: Jill Granoff
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Chief Financial Officer: David P. Edelman
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Principal, Integrated Corporate Relations, Inc.: James R. Palczynski
Key Investors Issues
- Consolidated net revenues were $111.2 million down 6.6%.
- The net loss was $2.1 million or 11 cents a share compared to a net gain of $3.3 million or 16 cents a share in the prior year.
Half Year Highlights:
- Revenues were $213.5 million, down 6.4% from $228 million in 2007.
- Net loss came in at $1.2 million or 7 cents a share from a profit of $6.7 million or 33 cents a share in 2007.
- Capital expenditures for the six months were $2.8 million.
Second Quarter Highlights
Consolidated net revenues were $111.2 million down 6.6% compared to $118.9 million in the year ago quarter driven nearly entirely by softness in the wholesale business.
- Wholesale sales including sportswear were $57.9 million versus $67.1 million in the year ago period.
- Higher levels of sales dilution, poor results from the department store channel and a generally sluggish environment were the primary drivers behind the decline.
- While footwear was down across most of divisions the firm did experience high single digit growth in handbags and is pleased that thewholesale backlog as of this morning is up 3.5% albeit with most of the improvement weighted towards the end of the third quarter and early in the fourth quarter.
- Consumer direct sales rose 4.2% to $43 million versus $41.2 million in the year ago quarter.
Licensing and royalty income was $10.3 million versus $10.6 million in the year ago quarter with the decrease in the royalty revenue due to the re-acquisition of the men’s sportswear license.
- This was partially offset by increases in existing licensees and the launch of Le Tigre at JCP, Penney’s.
- Gross profit margin was 41.4% versus 44.3% in the year ago quarter again reflecting the highly promotional environment.
- Total operating expenses were $49.1 million versus $48.9 million last year due to additional costs for new business initiatives for men’s sportswear and Le Tigre and were partially offset by other cost savings throughout the company.
- However SG&A as a percent of revenues rose to 44.2% versus 41.1% due primarily to the de-leveraging in wholesale.
Interest income declined to $354,000 from $1.6 million in the year ago quarter reflecting lower interest rates between Treasury invested in vehicles and the money market rates earned in the year ago period.
- The net loss was $2.1 million or 11 cents a share compared to a net gain of $3.3 million or 16 cents a share in the prior year due to lower revenue..
- Cash and equivalents declined $36 million to $72 million versus $108 million at the end of the same quarter last year.
- The firm has used approximately $54 million in the share back program and acquisition of Le Tigre, $39 million to buy back 2.3 million shares and $15.5 million for the purchase of the Le Tigre business.
- Capital expenditures for the quarter were $1.7 million primarily for new store openings.
Strategic Review Process:
- The firm is conducting an in depth review of the business in order to develop a clear and compelling three-year strategy to increase sales and drive improved returns for shareholders.
- Kenneth Cole is a well recognized contemporary lifestyle brand that is under penetrated on a global basis.
- The brand has opportunities to grow by gender, by category, by geography and by channel of distribution.
- Operations can become significantly more profitable, the firm can capture economies of scale, streamline infrastructure and improve margins in a variety of ways.
Meetings with all of the KCP associates and an online survey, showed that this organization understands well the challenges it faces and has good ideas on how to overcome them.
- The firm then conducted deep dives with each functional and business area which included a very granular analysis of performance, extensive product line reviews, visual displays of marketing and merchandising programs and discussions on operational capabilities.
- Management has also spent a significant amount of time with many of the key partners outside the business.
- It has also received valuable input from a variety of consultants, industry advisors, fashion media and editors, shareholders and analysts on topics such as branding products, marketing, merchandising the store experience and business performance.
There are many opportunities to further raise brand awareness outside of footwear to further define the Kenneth Cole lifestyle and create growth.
- The firm is adding significant new brand appropriate assortments of core basics, casual items and seasonless product to address this and to round out the assortment beginning this fall.
- In addition to design it has a big opportunity to get the right product in the right stores at the right time.
- It will look at opportunities to optimize merchandise planning and allocation to increase product sell through and minimize markdowns.
The major issue is that stores are too big which causes low productivity and negative profitability.
