Perry Ellis International, Inc. reported a net loss in the second quarter was $5.4 million, or 36 cents per fully diluted share compared to net income of $267,000, or 2 cents per share, last year. The latest quarter was impacted by a combined 27 cents per share in charges.
The company also reported a shift in revenue from the second quarter to the third quarter, which negatively impacted results by $0.07 per share. This shift related to delayed shipments as a result of integration issues with a third-party logistics distributor on the West Coast.
In addition, the company indicated that bankruptcies of certain retail customers in the quarter affected revenues by approximately $6.0 million and earnings per share by approximately 8 cents. The company has been proactive in its risk management with accounts receivable and has mitigated exposure on these customers.
“While revenue and gross profit were in line with our expectations, our results were affected by increased costs and reduced shipments related to the move to third-party distribution from our facility in Winnsboro; a repositioning of our European operations and incremental costs associated with newly acquired businesses. Combined this led to results that were well below a year ago and overshadowed strong performances for many of our growth platforms, including Perry Ellis Collection, swim, golf lifestyle and Laundry and C&C of California. Importantly, we believe the investments we are making in our brands, businesses and infrastructure position us for increased profitability and growth potential in the near future,” Oscar Feldenkreis, President and COO, commented.
Second Quarter Operations Review
For the second quarter of fiscal 2009, total revenues were $193.7 million, a $1.6 million reduction compared to $195.3 million reported in the second quarter of the fiscal year ended July 31, 2007 (“second quarter of fiscal 2008”). This decline was primarily driven by underperformance of the outlet division, disruptions due to management changes in European operations and the impact of multiple retailers declaring bankruptcy this quarter. In addition, shipping issues with a third party logistics provider in the West Coast affected deliveries for the Perry Ellis brand, further impacting revenues in excess of $3 million this quarter. The majority of these orders however, were shipped in August.
Gross profit increased by $0.5 million to $62.2 million compared to $61.7 million during the second quarter of fiscal 2008 with gross margin improving 52 basis points to 32.1% of net revenues. This improvement is a direct consequence of the Companys strategic shift from private label into branded business. During the second quarter of fiscal 2009, the Companys private label bottoms business decreased $9.3 million in revenue, partially offset by strong performance in the swim platform; revenue increases both in Perry Ellis Collection and golf lifestyle brands; plus the addition of Laundry by Shelli Segal and C&C California.
Compared to the second quarter of fiscal 2008, operating expenditures grew by $6.9 million during the second quarter of fiscal 2009. This increase was driven by continuous investment in Perry Ellis Internationals growth initiatives: (1) womens contemporary, through the addition of a design team for sportswear and increased investments in marketing, advertising and samples; (2) Europe, through the hiring of a new management team upon retirement of the previous Managing Director; (3) retail, with the opening of two new stores and (4) e-commerce, with the addition of a new vice president and increased investment in viral marketing and other Web 2.0 initiatives.
“The opportunities we have identified in our major growth initiatives such as womens contemporary, international and e-commerce compels a corresponding commitment of resources and management attention. At the current stage, we must continue to invest in the development plans on our key growth opportunities if we are to maximize their potential,” Mr. Feldenkreis concluded.
Also during the second quarter, the Company determined that certain marketable securities which were classified as available for sale were deemed to be other than temporarily impaired. The Company has recognized a pre-tax impairment of $2.0 million or a net loss of ($.08) per fully diluted share for these marketable securities.
As a result, EBITDA as adjusted was $1.9 million for the second quarter of fiscal 2009, compared to $8.3 million, representing a reduction of $6.4 million over the same period last year. A table showing the reconciliation of EBITDA and EBITDA as adjusted to net income is attached.
The Company continued strengthening its financial position. Proactive retail planning led to a decrease in inventories of $3.3 million compared to the same period last year, reaching $133.1 million at quarter end. The Companys total debt was $197.0 million at the end of the second quarter of fiscal 2009, representing a debt to capital ratio of 41% compared to 40% for the same period last year. Excluding the contemporary womens acquisitions funded by its senior credit facility in the amount of $33.1 million, the Companys total debt and debt to capital ratio would be reduced significantly. Borrowings under the Companys line of credit at the end of the quarter were $22.3 million, out of $175 million available.
First Half Operations Review
For the six months ended on July 31, 2008 (“first half of fiscal 2009”), revenues increased by 3.1% to $437.2 million from $424.1 million during the six months ended on July 31, 2007 (“first half of fiscal 2008”). The Company also improved gross profit margins by 68 basis points compared to the same period last year. Due to investments in Perry Ellis growth platforms-womens contemporary, Europe, retail and e-commerce, the Company increased operating expenses by $14.6 million from $108 million during the first half of fiscal 2008. Driven by these increases and the impairment of marketable securities, net income declined from $9.8 million to $3.7 million – a $6.1 million reduction, compared to the first half of fiscal 2008.
“Although we grew revenue by $13 million and improved gross margins by 68 basis points during the first half of fiscal 2009, multiple factors have contributed to an unsatisfying second quarter performance. Faced with a challenging macroeconomic environment, shipping issues, the underperformance of some of our legacy businesses and the decision to fund our growth initiatives, we have decided to take a long term perspective and continue the funding of our growing businesses while rationalizing our expense structure,” said George Feldenkreis, Chairman and CEO.
Fiscal 2009 Guidance
The Company confirmed its revenue guidance for the twelve months ending January 31, 2009 (“fiscal 2009”) at $910 – $925 million.
“We are confident in our ability to keep driving both top line growth and gross margin improvements for the remainder of the year, as we continue delivering on our successful branded strategy. Our Perry Ellis Collection, swim, golf, Hispanic and action sports businesses are on track for a record year, while we expect a very strong fourth quarter for our womens contemporary business, with the initial shipments for the Holiday season.”
However, based on these events and increases in ongoing expenses, the Company updated its earnings guidance to the range of $1.67 to $1.72 per fully diluted share from the previously announced $1.95 to $2.00 per fully diluted share. This new range includes the $0.08 non-cash impairment charge for marketable securities incurred this quarter.
“We believe our guidance is prudent yet remain optimistic regarding our outlook for the balance of the year, Feldenkreis continued. “As we get a better reading of the macroeconomic issues in the second half of the year, rationalize our expenses and assess the impact of the actions undertaken in our European operations and retail, we will update our guidance accordingly. We have the right business strategy and a solid foundation to deliver strong growth and outstanding results to our shareholders now and in the future,” Feldenkreis concluded.