Perry Ellis International, Inc. reported third quarter earnings that beat analysts' expectations and its CEO said an economic recovery was well underway. Citing improving sales in the fourth quarter, the company upped its earnings estimates for the year despite a 15.5% decline in sales through the third quarter.
“As the global economy begins to emerge from this deep recession, the company is well on its way to reverting to a growth pattern,” said Oscar Feldenkreis, President and COO of Perry Ellis International. “We see the current holiday season as the beginning of the recovery.”
The cost reduction initiatives launched at the end of fiscal year 2009 and strict expense controls during the third quarter of fiscal 2010 resulted in operating expense reductions of $11.5 million. Operating expenses at $52.0 million represented an 18% reduction compared to $63.5 million for the third quarter of fiscal 2009. These reductions contributed to earnings before interest, tax, depreciation and amortization (EBITDA) for the quarter of $12.3 million.
As a result of strict inventory controls and reduced operational chargebacks, the company's gross margins for the third quarter of fiscal 2010 expanded to 34.2%, an improvement of 10 basis points compared to 34.1% for the same period the prior year.
â€We are pleased with our gross margin improvements for this quarter,” said Feldenkries. “Despite margin pressures we have experienced throughout this fiscal year, our investment in information systems and our proactive management of the supply chain has more than offset them.”
Total revenues for the third quarter of fiscal 2010 were on plan at $178.5 million. These results represented a $44.3 million revenue decline compared to $222.8 million reported in the third quarter of fiscal 2009.
Compared to third quarter last year, the company increased revenues in certain businesses including:
- Continued strong performance at Kohlâ€s with above plan sell-thru for GrandSlam and increased penetration of Hispanic brand Centro;
- Increased door penetration at mid-tier for the re-launched John Henry brand;
- Improved comps for same store sales at Perry Ellis and Original Penguin direct-to-consumer divisions;
- Initial shipments for Callaway Fall â€09 product at department stores; and
- Above plan performance for Laundry by Shelli Segal and leather accessories under the Perry Ellis brand at the department store channel.
â€Our Perry Ellis Collection, mid-tier brands, golf and Hispanic businesses all reported a strong third quarter and are positioned for growth in the holiday and spring seasons,” Feldenkreis commented. “We are excited about our fourth quarter prospects.â€
These results were offset by the overall weakness in the department store and luxury distribution channel, particularly for the swim category, plus the planned and previously announced reductions in the following businesses:
- Door count reduction for Perry Ellis Collection by exiting of unprofitable doors at the department store distribution channel, accounting for $14.2 million for the quarter;
- Planned exit of mass merchant private label business accounting for approximately $11.8 million;
- Anticipated exiting of PING golf business at the corporate channel of $4 million;
- Departure of multiple retailers which filed for Chapter 11 during fiscal 2009, accounting for revenues of approximately $1.7 million;
- Exit of the Dockers outerwear license and menâ€s specialty store business of approximately $6.5 million for the same period last year.
â€Based on current trends, we are confident that the third quarter marks the final quarter of revenue declines for our company. Initial readings point to a solid holiday season and a strong first quarter for fiscal 2011. As the economy rebounds, we believe that the decisive actions taken during these challenging times have positioned Perry Ellis International as a stronger, more efficient and better managed company for fiscal 2011 and beyond,†Feldenkreis concluded.
Balance Sheet and Liquidity Review
For the third consecutive quarter, the company improved its balance sheet. The continued discipline in working capital management allowed the company to keep its senior credit facility unutilized, providing $125 million in availability at the end of the third quarter. Additionally, the company reported $25.5 million in cash and cash equivalents.
Proactive retail planning and inventory discipline allowed the company to reduce its inventories by $28.5 million, or 22.5%, compared to October 31, 2008, ending the quarter with total inventory of $97.9 million. Inventory turns increased to 4.52 times, compared to 4.28 times last year. Accounts receivable were reduced to $123.6 million, compared to $149.2 million as of October 31, 2008. This represents a $25.6 million or 17.1% reduction, in line with the net sales reduction for the quarter.
Fiscal 2010 Guidance
Better than expected results during the third quarter of fiscal 2010 have allowed the company to increase its earnings guidance to the range of $0.80 to $0.95 per fully diluted share, from the previously announced $0.70 to $0.85 range, for fiscal year 2010.
â€Despite the uncertainty in the consumer environment, we continue to perform at our growth platforms and deliver on our cost cutting initiatives,†Feldenkreis continued. â€Although we keep trending ahead of our internal plans, we remain conservative in this uncertain environment and our current guidance reflects this.â€
The company also confirmed its guidance for fiscal 2010 of total revenues decreasing in the low double digit range, but revenue growth and gross margin improvements for the remainder of the current year. Finally, the company announced that it will provide fiscal 2011 guidance after the end of the current holiday season.
â€We are cautiously optimistic about fiscal 2011. Next year should see Perry Ellis International returning to a solid growth path, with gross margins expanding and operational leverage resulting from expense control initiatives executed throughout this year as well as new business initiatives. As we move along during this critical holiday season, we will provide our guidance for next year,†Feldenkreis concluded.
| PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES | |||||||||||||
| SELECTED FINANCIAL DATA (UNAUDITED) | |||||||||||||
| (amounts in 000's, except per share information) | |||||||||||||
| INCOME STATEMENT DATA: | |||||||||||||
| Three Months Ended | Nine Months Ended | ||||||||||||
| October 31, 2009 | October 31, 2008 | October 31, 2009 | October 31, 2008 | ||||||||||
| Revenues | |||||||||||||
| Net sales | $ | 172,154 | $ | 216,232 | $ | 539,172 | $ | 641,398 | |||||
| Royalty income | 6,397 | 6,583 | 18,592 | 18,665 | |||||||||
| Total revenues | 178,551 | 222,815 | 557,764 | 660,063 | |||||||||
| Cost of sales | 117,564 | 146,915 | 378,335 | 437,359 | |||||||||
| Gross profit | 60,987 | 75,900 | 179,429 | 222,704 | |||||||||
| Operating expenses | |||||||||||||
| Selling, general and administrative expenses | 48,704 | 59,933 | 150,778 | 182,529 | |||||||||
| Depreciation and amortization | 3,292 | 3,551 | 10,305 | 10,898 | |||||||||
| Total operating expenses | 51,996 | 63,484 | 161,083 | 193,427 | |||||||||
| Operating income | 8,991 | 12,416 | 18,346 | 29,277 | |||||||||
| Impairment on marketable securities | – | 580 | – | 2,563 | |||||||||
| Interest expense | 4,711 | 4,355 | 13,295 | 13,134 | |||||||||
| Income before income taxes | 4,280 | 7,481 | 5,051 | 13,580 | |||||||||
| Income tax (benefit) provision | (26 | ) | 2,244 | 107 | 4,288 | ||||||||
| Net income | 4,306 | 5,237 | 4,944 | 9,292 | |||||||||
| Less: net income attributed to noncontrolling interest | 168 | 238 | 265 | 565 | |||||||||
