Icon Energy Corp (ICON) 2003 Q3 法說會逐字稿

Good morning. Thank you for joining Candies third quarter conference call. With me this morning is Neil Cole, Chief Executive Officer, and Richard Danderline, Executive Vice-President of Finance and Operations.

Before we begin let me read the Safe Harbor Statement. Any statements that are not historical facts are forward-looking statements. These forward-looking statements involve a number of known and unknown risks, uncertainties and other factors, all of which are difficult or impossible to predict and many of which are beyond the control of the company. As a result, the actual results or performance of the company could be materially different from any results, performance implied by such forward-looking statements. The words believe, expect, anticipate, seek and similar expressions identify forward-looking statements and list as our caution not to place undue reliance on these forward-looking statements.

Richard?

Good morning. The results for Candies Inc. for the three and ninth months ended October 31, 2002 are as follows.

For the three months ended October 31, 2002, consolidated net revenues increased by 61.7 percent to 43.2 million from 26.7 million in the comparable period last year. Net income declined from income of $297,000 or one cent per fully diluted share in last year's third quarter to a loss of 788,000 or three cents per fully diluted share in the current year quarter.

Since May 1, 2002, the operating results of Unzipped apparel have companies Bongo jeans wear business are included in the company's consolidated results. Consolidated gross profit for the third quarter was 11.4 million or 26.3 percent of net revenues, compared with 8.5 million or 31.6 percent of net revenues in the comparable period last year, a decrease of 530 basis points primarily due to a shift in product mix that resulted from the inclusion of Unzipped, which operates at lower gross profit margins.

Selling, general and administrative expenses were 10.7 million or 24.8 percent of net revenues, compared with 7.7 million or 28.9 percent of net revenues last year, a decrease of 410 basis points primarily due to the inclusion of Unzipped, which also operates with lower selling, general and administrative expenses. Operating income was 477,000, versus 625,000 in the comparable period last year.

Interest expense for the quarter was $1.3 million, compared with 328,000 in the prior year quarter, and included in the current year 200,000 from an eight percent subordinated note issued in connection with the acquisition of Unzipped. The original purchase agreement indicated that the 11 million would be issued as redeemable preferred stock. At July 31, 2002, that 11 million was classified as redeemable preferred stock, and $200,000 of dividends were recorded in the second quarter.

During the current quarter, the agreement was revised, and the $11 million was retroactively changed to debt with 200,000 recorded as interest expense in the current quarter. In addition, the second quarter dividend of $200,000 was retroactively reclassified as interest expense. Also included in interest expense in the current year third quarter was $346,000 related to the satisfaction of a long-term capital lease obligation.

Looking at the segments, Unzipped contributed $18.8 million of net revenues in the current year quarter. Gross profit was 3.8 million, or 20.3 percent of net revenues, and selling, general, and administrative expenses were 2.1 million, or 11.4 percent of net revenues. Unzipped contributed 1.7 million of operating profit.

In the Candie's footwear business, net revenues, including licensing income, by 8.2 percent to 24.6 million, from 26.7 million in the comparable period last year. Licensing income for the period was flat at 1.4 million versus the prior-year period. However, comparable licensing income increased 380,000, as the prior year period included $357,000 of royalties from unzipped. Gross profit was 7.6 million, or 30.9 percent of net revenues, compared to 8.4 million, or 31.6 percent of net revenues last year, a decline of 70 basis points.

Selling, general and administrative expenses were 8.6 million, or 34.9 percent of net revenues, compared to 7.7 million, or 28.9 percent of net revenues last year, an increase of 600 basis points, primarily due to expenses resulting from new stores. Operating loss was 1.2 million, versus income of 625,000 in a comparable period last year.

For the nine months ended October 31, 2002, consolidated gross profit was 34.1 million, or 28.8 percent of net revenues, compared to 25.9 million, or 31.4 percent of net revenues in the comparable period last year. Selling, general and administrative expenses were 28.3 million, or 23.9 percent of net revenues, compared to 22.9 million, or 27.8 percent of net revenues in the prior period. Operating income was 5.4 million, versus 2.6 million in the comparable period last year.

For the nine months ended October 31, 2002, consolidated net revenues increased by 43.6 million to 118.4 million from 82.5 million in the comparable period last year. Net income increased to 3.6 million or 14 cents per fully diluted share from a 1.7 million, or seven cents per fully diluted share in the comparable period last year.

Looking at the balance sheet, the company's working capital position was $10.1 million at October 31, 2002, as compared to 1.9 million at the end of the prior year quarter. Factored accounts receivable were 20.6 million compared with 7.7 million at October 31, 2001. Of the 20.6 million at the end of the current year quarter, 12.8 million were attributable to Unzipped such that comparable factored accounts receivables increased by only $200 thousand to $7.9 million. Inventories were $18.7 million, of which $8.3 million were from Unzipped versus 7.8 million at October 31, 2002. Comparable inventory increased by 2.6 million to $10.4 million.

Amounts due under the Company's revolving credit arrangements were 21. million--21.0 million at October 31, 2002, of which 15.1 million was from Unzipped as compared to 11.1 million at the end of the prior year quarter. Comparable amounts decreased by $5.2 million to $5.9 million. Long-term debt was approximately $31 million and reflects the aforementioned $11 million of eight percent subordinated notes issued in connection with the acquisition of Unzipped. Finally, the Company anticipates that fully diluted earnings per share for the full fiscal year will be approximately 14 cents on net revenues of approximately $155 million. This does not include any charges which may result from the possible closing of up to three non-performing stores which could cause results to vary by two to three cents per share.

At this time, I'd like to turn the call over to Neil Cole, President and CEO of Candies, Inc.

Thank you, Rich. As you can see in this morning's press release, our business continues to grow, primarily due to our Bongo jeans wear division which was acquired last April. What I'd like to do this morning is break the business down into three operating components, footwear, jeans wear and licensing, and discuss the performance of each, starting with footwear, which has been the most challenging.

The margin erosion that started with back-to-school, we see continuing throughout the end of the year. Our focus on margin improvement is based on reducing inventory exposure and utilizing a cut-to-order system. We have also put in place a plan to reduce our overhead by roughly 20 percent in the footwear division over the next 12 months. We have expended the Bongo footwear distribution into most major department stores to meet demands for a more price sensitive branded footwear consumer. Going into next year, we are planning footwear relatively flat going forward, with increases in Bongo footwear offsetting a decrease in Candies resulting from a renewed focus on higher margin consumers--customers. Today our Candies retail business has 18 stores, including our Web store. Year-to-date comp sales have been off approximately nine percent. Without three of our lowest performing stores, which we are considering closing, year-to-date comp sales would have decreased only four percent. To combat these trends, we are in the process of refocusing our retail footprint back to footwear to capitalize on our vertical structure. We have put our retail concept store expansion on hold as we work to fine-tune our strategy. In September 2002, the Casual Male retail group, formally announced that it was re-evaluating the expansion of the Candies Outlet stores.

One scenario that is currently begin explored is possibly taking over by Candies Inc. of only the best performing stores to compliment our existing content store base. These discussions are ongoing and no commitments have been made.

The Bongo Jeans Wear business continues to outperform the market, and Bongo is currently one of the hottest teen brands in the market.

We continue to add new doors as well increasing sales at current doors. We continue to see opportunities for both sales and margin improvement in the Bongo Jeans Wear Unzipped business.

Over the next fiscal year, we have the benefit of the unzipped business for 12 months, which should support the company's projected sales increases.

Our licensing business continues to grow with the addition of four new Bongo licenses, which add to the already successful Candies licensing business. We anticipate increases in licensing income continuing into next year.

In summary, we are very confident about the future of our business. We have a dedicated and experienced team, two very strong brands, and the capital to enable us to execute our long-term goals.

Our balance sheet and brands are much stronger than they were a year ago and we are positioned to continue to increase revenue and profitability in fiscal '04.

Our strategies for next year are clear. We need to continue to work hard at improving our footwear margins and continue to build on the successes in both licensing and Jeans Wear.

With that, I'd like to open it up to a question-and-answer and hopefully answer all of your questions.

Operator , can you?

Yes, thank you. If you would like to register your phone line for a question, you may do so by pressing the one on your tough-tone phone. If your question is already answered, you can withdraw by pressing the pound key. Once again, to ask a question, press the one on your touch-tone phone.

We go first to from . Please go ahead.

Hi, good morning.

Morning .

Good. You mentioned that you're confident about your business. I'm not so confident about your business. Your track record over the last year has been horrendous and frankly, this quarter was what I thought probably a disaster. And I'd like to understand where the management is in place to take this to the next level, because currently I don't really see that in your business.

, one of the reasons my confidence is if you look at the company a year ago today, the company lost last year about a $1 million, I think we lost about $2 million. This year our plan is to make close to $3 million. Our sales are increasing from $100 million to about $155 million. Yes, is it disappointing and what's happened over the last six months and did we think that footwear was going to be three to four points higher in gross margin and about $4 million higher in sales, yes, but we still, you know, in a tough, tough teen market, where each of our customers unfortunately, a lot of them have disappointed and taken sales down, we have not gotten a lot of footwear excitement over the last three or four months, we're reacting. And our brands are strong, and our market share's increased in both Candie's and Bongo. The company was able to -- you know, do a financing this year and raise money. Yes, we are disappointed. Yes, we are questioning our operations, but we have a very good, sound business, and we're confident that we're going to be able to turn it around and make it continue profitability and make it better.

Well, let me -- I don't understand...

OK, once again, if you would like to ask a question, you may do so by pressing the one on your touchtone phone.

That question -- the last question was breaking up. Op -- are you there?

Mr. , please press the one no your touchtone phone to ask another question. Thanks Mr. .

All right, what I don't understand is -- I mean, it looks like the Bongo brand is doing really, really well and the Candie's brand is doing horribly. And the Candie's brand -- I'm just wondering, maybe it just pays to shut down this whole Candie's brand and recall your company Bongo's and then make the money from Bongo's. It just doesn't seem to me that Candie's is a viable brand in this kind of marketplace.

The Candie's brand is clean, it's in better stores. We've taken it out of all discount distribution. Its business has grown in Nordstrom's and Journeys. It's been under marketing pressure, and boots that last year we sold left and right for $79 and $89 are going out the door at 49 and 59, and it's an incredibly promotional marketplace, but our brand is strong. I mean, if we put good product together and get our merchandising strategies. We have not damaged the brand. We have reduced the amount of shipments in the Marshalls and TJs, and if you look at the business, although we are disappointed, it has improved every year over the last three years, in every line.

We have improved -- you know, the margins by about -- slightly every year, and the way we've repositioned with the Bongo launch, we think it's complemented the Candie strategy. The other thing that we've done -- we've done an overhead reduction in the footwear business, which we think will bear fruit for the next 12 months.

Well, I sure hope so.

Thank you.

Our next question comes from from Capital Partners. Please go ahead.

Hi. A follow up on the first question. Is -- are you looking in any way to increase the depth of management, because you've got Bongo's, you've got Candie's. So you've got two footwear lines, two apparel lines. What's being done in that area?

, we're always looking to improve ourselves in all aspects. And we're constantly -- and we have been focusing on a couple of key positions. But we've also got a pretty strong team, but yes, we need to improve various aspects of the business and management, and the board are focused on it.

OK, thank you.

Once again, if you would like to ask a question, press the one on your touchtone phone now.

Once again, to ask a question, press the one on your touchtone phone. We'll go to from Partners. Please go ahead.

How are you doing? I was just wondering -- could address inventories right now, where we stand going into the fourth quarter? And your guidance was -- looks like 14 cents. Last quarter I thought maybe you had discussed 19 to 22 cents. Thanks.

Yes. First addressing the inventory issue, most of the increases in inventory year-over-year come from our retail business where we've expanded our store base and going into fourth quarter our inventories are relatively flat on a wholesale basis compared to the prior year and I would say 99 percent current in terms of seasonality. And to address the second question, yes we did give guidance at a higher level at the end of last quarter for the final six months of the year and we have adjusted it in today's conference call to 14 cents for the full year.

OK. Great, thank you.

Once again, to ask a question, press the 1 on your touchtone phone. We'll go to from AG Edwards. Please go ahead.

I guess this is--I'm speaking to Neil?

Yes. Neil and Rich.

Yes. I guess I'm concerned about the, you know, the projections that you--I guess this is the second quarter--that you've lowered guidance and perhaps there's another approach that you can use, such as, you know, not give any guidance or just give a range, a broader range, rather than have guidance which can fall short. I mean, clearly it's a difficult economy we're all facing. It's a difficult retail environment. You are growing your revenues, although they seem to be reduced on your guidance, but I'd like to feel that there's more real guidance going forward, particularly if you're going to be closing some stores and not to all of a sudden see next quarter or the year come through at a profit of three cents of the entire year. I think, you know, many of us would like either a better focus on guidance or I myself would prefer, you know, no guidance in terms of numbers.

Right. Obviously--not obviously, but, you know, thank you for the suggestions and we've been analyzing that ourselves and where last year we were giving a year guidance, today we're giving two months. And what we're saying about next year is what we're comfortable at. We know our business is growing from a sales base, primarily due to Bongo footwear, Bongo jeans wear and licensing and we also--but we're not giving guidance for next year. We're basically looking at the quarter and, quite frankly, this management team should be able to do it based on this environment and we--that's why we use the word approximately and--but we are being very, you know, we are analyzing what we're doing and we're trying to be very careful going forward and I appreciate the suggestion.

Once again, to ask a question, press the 1 on your touchtone phone. We go next to David from Capital. Please go ahead.

Hi, Neil. In reference to Jim, his question that was just asked, how do you go about, you know, giving, I mean, internally. How are you, you know, how can you improve upon the projections? I mean, I realize it's, you know, it's a difficult environment, but clearly something's, you know, I mean, not working in terms of how the projections are being given.

Right, I mean, , basically it's just continuing to kick the tires every single day and analyzing the back order and seeing how real it is, and whether you get cancellations and whether the department stores come through with . It's a constant analysis of the quality of the backorder, of the quality of the receivables, your inventory and it's something that we as management team in this environment got to constantly looking at and I think it's been a major focus of our company the last 90 days, trying to understand it and put in place the necessary controls and a lot of it comes, you know, our big surprises over the last 90 days has been a deterioration in orders that we've had that haven't come through with , gross and payment and dilution in gross margin. It's a battle out there.

And do you think that those things, you were just totally shocked by, you just had no idea that would happen?

Yes, quite honestly, we believed it's going to, it's been a deterioration of the marketplace where products that we were selling for the last two or three years, our boots, at 79 and 69 great quality leather boots, there's no price, that's a price of 39, 49, and department stores are just being, it's a war with price points trying to generate sale. And they come back and it's a negotiation with us and what we have to do as a company, which we're resigned to is walk away from business and stop selling in places where we're losing money and chasing business, and that's ...

Yes, well, you the conference, earlier on in answer the questions, you were focusing on how your sales have improved and this brand, but obviously at the end of the day, you want to try and increase your cash flow and you want to focus more on profits that on the top line.

Correct, and that's what the footwear business is basically resigned itself to not growing until we get control of the quality of sales, the inventory and the gross profit and the gross margin and that's really the focus of the company right now and we've also done a major reduction in overhead. You know, the footwear business has roughly a $32 million overhead. We've put in a plan to decrease it to $26 million. Management has taken a 10 percent pay cut across the board. We've let go of 24 people over the last 30 days and we realize we're not going to grow this business in this environment by pushing more product out there. It's going to come from lowering SG&A, increasing turn and increasing margin.

But you also need, obviously, good people to be working with you and that's difficult, you know, with the stock being down so much and business being bad. I mean, how do you go about, you know, keeping up the motivation to do so.

You know, it's a challenge, but we have great brands. We have growth, and it's an exciting place to work, believe it or not. And we've got a loyal team of people. I've got some people that are pretty dedicated and we know the issues. We've got a great management team running the Bongo Jean business. Our licensing business continues to be strong. We've got to get control of the Candies gross profit and gross margin and we've come up with three or four strategies and we are going to do it this year.

OK, well thank you very much, and good luck Neil.

Thank you.

Thank you .

We go back to from AG Edwards. Please go ahead.

Neil, pricing seems to be a problem in many industries today, retail, automobiles. Everyone talks about deflation. That seems to be a big problem going forward. You've got $10 million in working capital. Is anything being done to either reduce costs of manufacturing, again, I'm not even sure where you do manufacture, where you import your leather, but to reduce the cost of particularly the footwear area, because pricing is a problem, it'll probably still be a problem going forward. And there'll probably be more and more sales, whether they're early January sales or post-Christmas sales or post Hanukkah sales or whatever.

Everyone's going to be out there undercutting everyone else to try to get the inventory off the shelves. And so as you're negotiating with the different vendors as to what they can sell your products for, the price goes down, the margins go down. So pricing is my question. What do you do to reduce the cost, particularly of the footwear area where there seems to be a problem?

We have to buy the product better, and we have to source better. Some of the initiatives that -- for instance, in jeanswear, we've moved a large percentage of our sourcing to Vietnam to avoid quota, which costs a lot of money. In footwear, you know, with the benefit of the dollar against the riyal, we are buying better. Our gross margins going in are higher. We have to reduce Q count. We have to attack it in every aspect, and we have to source better, and we have to diversify our sourcing.

One of the problems we've had in retail is depending on Candie's and not sourcing from a wide variety of manufacturers to get better product information. So yes, it's very -- there is a worldwide issue on this, we are getting better pricing. Do we need to get even better? Yes, and it needs to be our focus, because we do not see the American consumer paying more for product. And we do believe that this environment that's out there today is not going away. We think this is the new world, and this is not a blip, and we have to buy the product a lot better across the board, jeanswear, footwear, and everything we do to achieve better profitability, and better profitability in all our businesses.

Another concern that you mention -- not a concern. You probably said that you would be shutting down some stores that are not profitable. That, I think, is important, and that I think should be done as soon as practical. But the other thing that concerns me is keeping the stock above a dollar, because if it goes below a dollar you have the problem of NASDAQ de-listing, and that can create other problems regarding getting financing and getting moneys down the road.

The stores that we're talking about closing, we talked about a two to three cent charge, which would be about $600,000 or $700,000. This company is making money for this year. We have two brands that are going to do around $500 million of sales. I believe that our value will stay about a dollar, and hopefully it's not going to be an issue, but we do need to evaluate. If one of ours stores is losing almost half of what the nine percent and losing a lot of money, there's no reason to keep it open, and we have to evaluate our strategies to be sound, and we have a lot of good businesses. Our royalty business brought in over $5 million this year, and has planned to go up over 20 percent next year.

Our jeans wear business is profitable and growing. We have to get control of the footwear business and get control of the footwear margins. The stock was around a dollar something a year ago today. If we deliver half of what we think we're going to do, the stock will--I believe the stock will more than take care of itself.

We go next to Michael from . Please go ahead.

HI, Neil.

Hi, Michael.

Question for you. You know, I hear you talking about focusing on, you know, footwear margins, et cetera, does there come a point where it makes sense to just become, like, or Cherokee where you just basically keep the Bongo's business and keep the licensing business and either outsource the Candies manufacturing?

Michael, you know, as CEO of this Company and we have to--obviously, have to look at all strategic alternatives and look at our value of our assets and return value to our shareholders. So obviously, we're looking at all of our business. We have a hundred--we have a $100 million shoe business that can make money and it will make money, but obviously, you know, we have to look at all our businesses and we have to continue to evaluate both footwear, jeans wear, licensing and it's our--it's my responsibility and my Board and my management team to, you know, deliver value to shareholders. So whatever it takes, we will do it and we're committed to do it over the next 12 months.

OK, thank you.

We go next to Dan from Buckingham Capital Management. Please go ahead.

I didn't have a question. But anyway, hi, Neil.

You fell asleep on the switch.

Ah, no. I'll ask one anyway, Neil. For next year, could you give us some kind of--give us some kind of a feel? I mean, we got the enthusiasm from your voice. See if we can get it translated a little bit in this tough environment right now, how you feel about everything?

Danny, I think I just got a recommendation about three callers back ...

I heard that one. We don't agree with that.

And I think it's very important we regain our credibility in this market price and we deliver. I think there's a couple of things that I've said I'll reiterate. Our licensing business will continue to grow this year and revenue will continue to grow on that line and it's a very healthy line and growing. We've added four new licensees and we have numerous other prospects. Our jeans wear business continues to grow and the management team on the West Coast is very confident that that number will continue to grow and it doubles $4 million this year. Our challenge is getting control of the footwear margins. We think we have good strategy with the launch of Bongo footwear on a cut-to-order basis, reducing Candies distribution, close our channels by increasing margin, and turning better. And we have to--this team has--I believe I've gotten that message through some very frustrated and before. We have to deliver; we can't do it with our mouths and we have to deliver it in earnings per share over the next 12 months.

you can imagine at this moment that next year is going to be better than this year, can you?

I'm sorry, Dan, can you repeat that?

Next year, is there any way you can see next year as being worse than this year?

No. It took too long, Dan.

Yes.

We have to evaluate the marketplace. I mean, there's been in the last 90 to 120 days have--if you ask--if I sat here in July and could have imagined what was going to happen five months later. So I think that this management team has to prepare and run our business in a new reality and a new world, and we have to prepare ourselves and look at maximizing shareholder value, look at where we're getting returns, and start delivering.

You know the big thing that you mentioned in the footwear was the problem with the department store industry and the way they're working and what's happening with the lack of sell-throughs and then coming back to you as far as monies, right?

Yes, but it's not just department stores. It's specialty stores too. It's, you know, it's across the board, up and down the mall. It's not just in the anchors, and yes, it's the erosion in our margin when we believe we have the sales at a certain margin, and at the end of the day getting paid after mark-down allowance and sell-through and shipping and everything that's done, that has been somewhat of a moving target getting our hands around over the last 90 days and negotiating with our quote, unquote retail partners.

Everybody's got that problem, some people make money, some people don't, you've got a great brand name, if you'd just make the business somewhat smaller, a little more controlled, what you're talking about and you've got Bongo, which is good business, you've got licensing. There's no way and you'll need less money if you reduce your volume a little bit on Candies.

You could at least double I mean.

You've got a marvelously structured company. You got plenty of days in sales, between shoes and sportswear. You've got a good licensing business. If you screw it up, it's because you're screwing it up from now on. It's there to be had and done right. I mean, you built it into a great position.

Let me ask on the Gadzooks, that's being renewed also now?

Yes, Gadzooks was renewed and it is growing over, it's growing now.

OK.

With the Candies Apparel.

I think they singled us out for a question, but they want everyone on the call to ask a question, so if I didn't push any star-one or anything.

He was holding my was holding my hand all the time.

Any other questions? I will be obviously in my office and I will talk to everyone over the next day or two. Thank you all for listening. I share the frustration. No one takes it more personally than I do. My team is, I'm committed, we are committed to delivering this market price, you know, as mentioned, I feel the same. We have great brands. We have to get control of the footwear business. We have a growing, exciting Jeans Wear brand in Bongo. We have great licensing opportunities. Now it's time, over the next 12 months, for this management team to deliver in a very difficult marketplace, but we are committed to do so. And thank you all for listening and I'll talk to you soon. Thanks.