Kenneth Cole Productions, Inc. (KCP)
Q2 2009 Earnings Call Transcript
August 6, 2009 4:30 pm ET

Executives

James Palczynski - Principal, Integrated Corporate Relations
Jill Granoff – Chief Executive Officer
David Edelman – Chief Financial Officer

Analysts

Scott Krasik - C.L. King & Associates
Sam Poser - Sterne, Agee & Leach
Jeff Van Sinderen - B. Riley & Co
Heather Boksen - Sidoti & Company

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Second Quarter 2009 Kenneth Cole earnings conference call. My name is Gerry and I will be your coordinator today. At this time, all participants are in a listen-only mode. (Operator Instructions) We’ll facilitate a question-and-answer session towards the end of the conference. If you care to question then you press * followed by 1 at any time. If at any time during the call you require assistance please press * followed by 0 and a coordinator will be happy to assist you. As a reminder this conference is being recorded for replay purposes. I would now like to turn the presentation over to Mr. James Palczynski with ICR. Sir, you may proceed.

James Palczynski – Principal Integrated Corporate Relations

Thank you operator. Good afternoon, everybody. Before we get started, I’d just like to remind you of the company’s Safe Harbor language. The statements contained in today’s conference call, which are not historical facts, may be deemed to constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual future results might differ materially from those projected in such statements, due to a number of risks and uncertainties, including but not limited to, demand and competition for the company’s products; the ability to enter into new product license agreements or to renew or replace existing product license agreements; changes in consumer preferences or fashion trends; delays in anticipated store openings; and changes in the company’s relationship with retailers, licensees, vendors, and other resources. The forward-looking statements contained in today’s call are also subject to other risks and uncertainties that are described in the company’s reports and registration statements filed with the Securities and Exchange Commission.

With that out of the way, I’d like to now turn the call over to Jill Granoff, Chief Executive Officer of Kenneth Cole Productions.

Jill Granoff – Chief Executive Officer

Thank you, James. Good afternoon and thank you for joining us to review our second quarter results. With me today is David Edelman, our Chief Financial Officer. We continue to make progress against our operational and strategic plan during the second quarter. I’m encouraged to note that our financial results, while still unacceptable, were better than expected. For the second quarter, we reported revenues of $94 million and a loss per share of $0.18. This compares favorably to our guidance of revenue in the range of $90 million to $95 million, and a loss per share of $0.25 to $0.30. As everyone knows, we are experiencing the worst economic environment in decades. We have seen dramatic changes in shopping patterns, increased price sensitivity, and significant retailer de-stockings. Nevertheless, we remain focused on returning to profitability and generating long-term growth. David will go through the numbers in detail in a few moments, but first I’d like to review some key highlights since our last call. Number one, very importantly we reduced our inventories by 28% versus the year ago level and ended the quarter with healthier and more balanced inventories as we committed.

Number two; our gross margin was 100 basis points better than the same quarter last year and 850 basis points better than the first quarter. This resulted from both reduced promotional activity and a better merchandise mix versus the prior periods. Number three; the impact of our ongoing cost control initiatives is reflected in the quarter’s results. You’ll see that our SG&A was down $4.1 million versus the year ago period. This is especially noteworthy considering that our numbers include expenses associated with operating 10 net new stores versus the prior year. Number four; we have continued to see promising results in our test of a new full priced retail concept. We know now that we can achieve a better economic model in a smaller footprint. In the test stores, comps are running approximately 20 points above the control group and margin is running six full percentage points higher.

Number five; we have also strengthened our capital position generating almost $12 million of cash in the second quarter. We continue to have no debt and ended the quarter with approximately $58 million of cash. Additionally, I’m pleased to report that since the close of the quarter, we converted our existing credit line to an asset-based facility providing us with increased availability and strategic flexibility if needed. Number six, and perhaps most importantly, we believe that our product is improving steadily driven by Kenneth’s creative and strategic leadership. We are increasing our focus on product innovation, and as a first step we have reinvented our Kenneth Cole New York Women’s Footwear business with a revolutionary comfort technology. I will tell you more about this exciting re-launch in a few minutes.

While this progress is encouraging, we are still disappointed in our overall financial results. To drive improved performance and return to profitability, we are continuing to reduce costs, increase margin and create sales growth. As I highlighted, we have reduced our inventory by 28% versus last year. Our assortments are much tighter. We have implemented a good; better, best merchandise mix with a healthier balance between fashion and core across all classifications. Our forward receipt plan now mirrors our expectations for the business and market conditions. We are also doing a more effective job of designing into key off-the-door price points. The combination of these activities should lead to further reductions in promotion and markdowns resulting in better gross margins.

In addition to enhanced gross margins, we believe that there are incremental opportunities to cut costs, particularly through process efficiencies including test-and-react initiatives, enhanced fulfillment capabilities and improved speed-to-market. I’d now like to update you on the progress we’ve made on our six core strategic initiatives. Number one, create compelling product. Number two, energize the brand. Number three, accelerate retail. Number four, revitalize wholesale. Number five, go global. And number six, create a winning consumer-driven culture. Now, in terms of creating a compelling product, great product is essential to our success. This means having high quality trend-right products and proper assortments with compelling price value. Kenneth is focused on re-inventing our business classification-by-classification. Our first major initiative is the re-launch of Kenneth Cole New York ladies footwear, with our patented comfort technology.

As you may remember, we acquired Gentle Souls four years ago, and we have now been able to engineer that patented comfort technology into attractive high-heeled shoes, a classification of women’s footwear that until now has never been able to be made truly comfortable. This re-launch is already generating excitement across our entire business. Kenneth describes this product as “The most comfortable shoe a woman ever looked good in...guaranteed”. If you watch Good Morning America tomorrow, you’ll see Kenneth talking about the shoes and the re-launch. This new footwear line is currently exclusive to our own full-priced retail stores to enable us to build momentum and drive traffic before we expand into wholesale distribution next year. We have already pre-sold several thousand pairs of five limited edition styles at full price, which we believe is unprecedented in this market environment. The shoes will be available for pickup beginning tomorrow. We expect to sell through the entire initial delivery at full price.

In terms of our broader product assortment strategy, core product is now 40% to 50% of the mix versus only 20% at this time last year. We are very focused on product that consumers can wear now, is appropriate for more than one season, is versatile for a variety of wearing occasions and thus delivers greater value. We’re excited about the new fall lines and we are seeing success in modern wear-to-work apparel including suits separates for men and dresses for women as well as casual fashion such as Denim, Tees and Athleisure footwear. In addition, we are working very closely with our licensing partners to develop Kenneth Cole into a global lifestyle brand. In particular, we continue to be very pleased with the performance of our women’s sportswear, men’s tailored clothing, outerwear, dress shirts, ties and belts.

In terms of our brand initiatives, our fall marketing campaign has received great feedback. Our marketing more clearly communicates our fashion identity while retaining our unique social voice. Our goal is to maintain our media presence while reducing our creative expense to generate a greater return on our overall marketing investments. We’ve also embraced social networking and the blogosphere to build a brand oriented community and strengthen the connection with our consumers. Perhaps, our most exciting current initiative is the re-launch of our Kenneth Cole New York women’s shoes. I hope some of you will join us tomorrow morning at 9:00 AM for a special event at our Rock Center store. Hundreds of people have told us, they are coming to pick up their shoes and meet Kenneth. As I mentioned, Kenneth will be appearing on Good Morning America tomorrow and will be on the Today Show next week talking about the product, which will also be featured in dozens of publications.