Perry Ellis Slightly Shrinks Q2 Loss

Oscar Feldenkreis, President and COO commented, “We are proud of delivering a second quarter slightly ahead of last year's net earnings, particularly under very challenging times. Perry Ellis International's management has acted decisively to reduce costs and respond to the challenges created by the current macroeconomic environment. We are pleased with the progress we have made and we remain laser focused on improving the performance of our divisions.”

Driven by strict cost controls as well as the cost cutting initiatives announced during the fourth quarter of last year, the company's second quarter operating expenditures decreased by $12.9 million to $51.1 million, compared to $64.0 million for the second quarter of fiscal 2009. These reductions led to an EBITDA for the quarter of $1.5 million.

During the second quarter of fiscal 2010, gross margins at 30.9% decreased by 120 bps impacted by the planned exit and inventory liquidation of the licensed PING golf and Dockers outerwear businesses, compared to 32.1% for the second quarter of fiscal 2009. Margins were also challenging in swimwear products and bottoms private label programs.

“Close collaboration with our retail partners, better mark-down management through our sophisticated planning systems and acute strategic door management provided for a reduction in markdowns and sales allowances from 9% of gross sales in Q2 last year to approximately 7% this year,” Feldenkreis continued.

On the revenues side, the company noted that it increased revenues in several of its core businesses including:

(i) Continued strong performance at mid-tier retailers across the modern, golf and Hispanic lifestyles;

(ii) Combined growth in golf lifestyle brands – Champions Tour, Pro Player and Links Edition brands; and

(iii) Successful introduction of the Merona swim program and Hispanic lifestyle brand Cafe Luna.

“We have seen acceleration in order demand for these categories for the fall season and the second half of the year. Our branded swim brands, denim platform, golf brands, Hispanic lifestyle brands and, overall, our brands distributed to mid-tier stores, are beginning to return to more normal levels,” Feldenkreis commented.

These increases were offset by a reduction in the following business segments:

(i) Weakness at the department store channel for swimwear product, affected by unusually cold weather, and for Perry Ellis brand accounting for $11 million;

(ii) Door count reduction for Perry Ellis Collection by the exiting of 127 unprofitable doors at the department store distribution channel, accounting for $3.5 million;

(iii) Planned exit of mass merchant private label business accounting for approximately $7 million;

(iv) Anticipated deceleration of PING golf business at the corporate channel of $5 million;

(v) Departure of multiple retailers which filed for Chapter 11 during fiscal 2009, accounting for revenues of approximately $5 million;

(vi) Exit of the Dockers outerwear license and men's specialty store business and the planned licensing of Perry Ellis dress shirt of approximately $3 million.

“We are optimistic about holiday and spring orders for the fourth quarter. Second half bookings point to strong results and we believe there will be a return to a normalized replenishment business,” Feldenkreis concluded.

First Half Operations Review

For the first six months, total revenues decreased by 13.3% to $379.2 million from $437.2 million a year ago. These decreases include lost revenues of approximately $44.3 million due to retailers filing for bankruptcy protection during fiscal 2009, the exit of the PING and Dockers licenses and the men's specialty store distribution channel, the planned licensing out of the Perry Ellis dress shirts business and the exit of multiple private label bottoms programs, primarily at Wal-Mart. Due to the highly promotional environment pervasive in the consumer goods industry during the first half of fiscal 2010, the company also reported a decrease in gross profit margins of 234 basis points compared to the same period last year.

Revenue and gross profit declines have been partially offset by the continued cost reduction process initiated last year. Compared to the first half of fiscal 2009, the company reduced its operating expenses by $20.9 million, or 16%, to $109.1 million. Lower utilization of the company's senior credit facility led to an interest expense reduction of $195,000 compared to the comparable period last year.

Balance Sheet Update

The company said it reported “its strongest financial condition in this decade, maintaining a healthy liquidity position.” Disciplined working capital management allowed the company to completely pay down its senior credit facility, providing the company with $125 million in availability at the end of the second quarter. Additionally, the company reported $29.5 million in cash and cash equivalents.

Continuing with its proactive retail planning and inventory discipline, the company reduced inventories by $29.7 million, or 22%, compared to July 31, 2008, ending the quarter with total inventory of $103.4 million. Inventory turns increased to 4.5 times, compared to 4.3 times last year. Accounts receivable were reduced to $100.1 million, compared to $114.5 million as of July 31, 2008. This represents a $14.5 million or 12.6% reduction, in line with the net sales reduction for the first half of fiscal 2010.

“By taking proactive and decisive actions and maintaining strict discipline in our cashflow management, we are positioning Perry Ellis International for a strong rebound as the economy improves,” George Feldenkreis, Chairman and CEO, commented. “As consumer confidence returns and the macroeconomic environment stabilizes, we will emerge leaner, stronger and focused on taking advantage of all available opportunities.”

Fiscal 2010 Guidance

Enhanced visibility for season orders for Holiday '09 and Spring '10 have allowed the company to provide earnings guidance in the 70 cents to 85 cents range for fiscal year 2010.

“In light of better visibility of the second half of the year and our strong cost controls, we have decided to provide earnings guidance,” Feldenkreis commented. “Based on our first half results we remain committed to reaching an EBITDA of at least last year's level.”

The company also confirmed its guidance of total revenue for fiscal 2010 to decrease in the low double digits and gross margin improvements in the second half of the year.

“Although our top line remains challenged for next quarter as retailers had already committed to conservative Fall' 09 plans, we expect to pick up momentum during the month of October and return to solid growth for the fourth quarter of this year,” Feldenkreis continued.

Finally, the company announced that capital expenditures will be in the $6 to $7 million range, down $1 million from the previously announced guidance of $7 to $8 million. This represents a reduction of between $3.5 and $4.5 million compared to capital expenditures of $10.5 million during fiscal 2009.

“We reported a first half above analysts' expectations during the most challenging economic times since the 1930's, and we are starting to see positive signs in the consumer environment. Although nobody knows with certainty if we have seen the worst of this recession, we remain confident in the financial strength of Perry Ellis International and our ability to take all necessary actions to deliver on our results. We are optimistic about the second half of this year,” the chairman concluded.