Steven Madden Ltd (SHOO) 2003 Q4 法說會逐字稿

Good morning, ladies and gentlemen and welcome to the Steven Madden, Ltd. call sponsored by Financial Dynamics. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session. Any reproduction this call, in whole or part, is not permitted without prior expressed written authorization of the company. As a reminder, ladies and gentlemen, this conference is being recorded. I would like to introduce your host for today's conference Miss Cara O'Brien of Financial Dynamics.

Thank you, operator. Good morning, everyone and thank you for joining us for this discussion of Steven Madden Ltd's fourth quarter and year-end results. By now you should have received a copy of the press release, but if you have not, please call my office at 212-850-5600; and we will fax one out to you immediately. Before we begin, I would like to remind you that statements in this conference call that are not statements of historical or current fact constitute forward-looking statements within meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties, and other unknown factors that could cause the actual results of the company to be materially different with the historical results; or from any future results expressed or implied by such forward-looking statements. The statements contained herein are also subject, generally, to other risks and uncertainties that are described from time to time in the company's reports and registration statements filed with the SEC.

Also, please refer to the earnings release for more information on risk factors that could cause actual results to differ. Finally, please note that any forward-looking statements used in this call should not be relied upon as current after today's date. I would like to now turn the call over to Jamie Karson, CEO, of Steven Madden, Ltd.. Jamie, go ahead, please.

Thanks, Cara. Good morning and thank you for joining us to review Steven Madden, Ltd's results for the fourth quarter and the year ended December 31st, 2003. With me to discuss the business are Richard Olicker, our President and Chief Operating Officer; and Arvind Dharia, our Chief Financial Officer. We are pleased with our overall performance during 2003, particularly as it comes on top of a recordbreaking 2002. Despite one of the most challenging years in our history, we posted sales that were essentially flat with the prior year. To be more specific on this point, our solid performance was achieved during a period in which our business evolved significantly from it's traditional casual base into broader categories including dress and tailored. Additionally, we have responded aggressively to the customers' demand for at-once, wear-now trend product. In conjunction with this shift in product focus, we experienced retail promotional pressures which, as indicated in our press release in January, resulted in high levels of markdown and allowance activity at wholesale; particularly during the fourth quarter.

Importantly, this shift in direction was taken as a result of listening to our customers; and our reactive operating model enabled us to quickly move into fresher categories that were in demand and continue to evolve today. Before I turn the call over to Richard, I would also like to mention that we remain in excellent financial health. We ended the year with a solid balance sheet with approximately $86 million in cash, cash equivalents and marketable securities; no long or short-term debt; and total stockholders' equity of $159 million. We believe that this proves the health and viability of our business, as we have an enormously strong foundation on which to build. Now I would like to turn the call over to Richard to review the 2003 operating results in more detail.

Thanks, Jamie. Let's review in detail what happened in 2003 for both the fourth quarter and the year. In line with our recently updated expectations, net sales for the fourth quarter, ended December 31, 2003 were $71.1 million; compared with $78.4 million in the fourth-quarter 2002. Net income was $2.6 million versus $4.2 million in the fourth quarter of 2002. Diluted earnings per share, which came in at the high end of our projected range was 18 cents compared with 31 cents per share in the fourth quarter of 2002. Gross margin for the quarter was 38.2% versus 39.4% last year; primarily reflecting the liquidation of slower moving inventory and the support of our wholesale customers initiative to clear products at retail. During the quarter we continued to make progress in managing our cost structure and, even while integrating two new wholesale divisions, we were able to reduce our total operating expenses; resulting in a 3.9% decrease from the comparable quarter in 2002. Now let's review what happened in each division during the quarter.

Revenue for the wholesale division which is comprised of seven brands: Steve Madden Women's, Steve Madden Men's, l.e.i., Steven, Stevie's, Candie's, and UNIONBAY; was $42.2 million versus $49.9 million in the fourth quarter of 2002. Taking you through our wholesale brands individually, fourth quarter sales of Steve Madden Women's were $17.8 million versus $21 million in the fourth quarter of 2002. The decline was a result of slower than anticipated selling at retail, which resulted in sluggish reorder demand, from the middle through the end of the quarter. This led to heavy and persistent promotional activity and markdown levels to assist in the clearance of product at retail. However, based on success at our own retail stores and our ability to quickly source and offer faux fur lined boot products at the December shoe show in New York City, we were able to exploit the shortness of supply in this important category for at-once and early first quarter deliveries. Also, positive momentum in pointy toe boots and dress shoes continued to build toward the end of the quarter, and we quickly move to maximize those opportunities.

L.e.i. Footwear sales were $11.3 million versus $13.8 million in the fourth quarter of 2002. Lower than planned, due to the sluggish performance at retail of junior chunky looks and the resulting lack of reorder demand. Dress shoes and flat casuals helped to support the division's business with both round and pointier-toe characters beginning to gain acceptance. Sales of Stevie's, our Children's brand, were $1.5 million versus $2.7 million in the comparable period. The decrease is largely due to disappointing performance in boot and slipper classifications. For the new Steven line, sales increased 46% to $3.8 million from $2.6 million in the fourth quarter of 2002; maintaining the momentum that began in the third quarter. It is noteworthy, and encouraging, that this gain was achieved without significant door expansion over the third quarter, demonstrating strong demand at existing A-level locations. The successful classifications included boots and booties, as well as feminine pumps; both in a variation of heel heights and toe shapes.

Sales at Madden Men's were $6.8 million compared to $9.7 million in the fourth quarter of 2002. This result basically reflects the fact that current trend is toward dressier looks, even for men, and we are anniversarying against large volume in the casual category last year. We are in the midst of refining and broadening the product mix to address that current dressy trend, without abandoning the core casual and sport business that brought us such extraordinary success in 2002. With respect to UNIONBAY, since reorder business did not immediately materialize against the initial third quarter tests, shipments were modest in the fourth quarter. Based on our belief that this Young Men's division required an infusion of new talent, during the fourth quarter we hired new management to strengthen and diversify the line. The refocused product was introduced this month at the WSA shoe show for fall shipping. Rounding out our wholesale revenues, Candie's began shipping for the first time in the fourth quarter and posted approximately $900,000 in net sales. Of note, the Kelly Clarkson boot, delivered late in season, enjoyed great retail success. Additionally, we are pleased with the account distribution base that the team has built for spring '04.

Moving to our retail division, retail revenues in the fourth quarter were $28.9 million versus $28.5 million. We ended the quarter and the year with 83 stores, including the Internet store. There were 77 locations in the comp base versus 72 on December 31, 2002, and same-store sales during the quarter decreased 3.3%. We are, nevertheless, pleased with this performance given that we were comping against last year's strong sales in the Women's casual categories and in Men's. Moreover, we were simultaneously taking aggressive steps to evolve the business to meet new trends; particularly in dress and seasonal boot items, and to achieve stable sales in light of this transition is something we were quite pleased with. Finally, store productivity remained high with sales per square foot of $644 dollars. During the quarter, the other income line was $1.9 million versus $2 million in 2002. This includes the commission income from our private label division, Adesso-Madden, and earned royalties from our licenses.

Private label income was $1.1 million versus $1.4 million. While there was some commission erosion versus last year, part of this is related strictly with timing with spring 2004 deliveries shifting from our fourth to our first quarter. Licensing income increased 45% to $802,000 from $555,000 last year. At the end of the year, we had six licenses covering a variety of categories including belts, hosiery and socks, optics and sunglasses. Now I would like to touch on our full year results which, in total, we are quite proud of.

Revenues for the year were essentially flat at $324.2 million versus $326.1 million in 2002. It is important to note that 2002 was a year during which we increased net sales by 34%. Wholesale revenues were $228.7 million versus $234.3 million in 2002. Steve Madden Women's was basically flat to last year at $109.3 million in revenue. The l.e.i. brand increased 8.9% to $60.6 million. Steven increased 11.8% to $12.5 million. Stevie's, the children's brand, decreased to $10.1 million. Men's decreased to $34.9 million. UNIONBAY totaled $320,000, and Candie's totaled $938,000.

Our retail division revenues increased 4% to $95.5 million versus $91.9 million in 2002. We added six stores and closed three for the 12-month period, and ended the year with 83 locations including the Internet store; versus 80 in 2002. Same-store sales decreased 3.9% for the year. Annual gross margin was 38.9% versus 38.8% last year, nearly flat year-over-year even while incorporating the fourth-quarter challenges which I discussed earlier. The other income line increased 20% to $7.9 million. Licensing income increased 55% to $2.8 million. And Adesso-Madden increased 6% to $5.1 million.

During 2003, we were able to effectively leverage our infrastructure and manage costs while continuing to support expansion of the business through the addition of new brands. This is reflected by our ability to hold the line on annual expenses, which were nearly flat year-over-year on both a total dollar basis, and as a percent of sales. Net income for the year was $20.5 million versus $19.8 million, and diluted earnings per share was $1.45 per share on 14,139,000 diluted weighted average shares outstanding; compared with $1.45 per diluted share on 13,710,000 diluted weighted average shares outstanding in 2002.

From a marketing perspective we are, of course, thrilled with the recent announcement that we are sponsoring music and fashion super star, Beyonce, in the Verizon Ladies First Tour which also features Alicia Keys and Missy Elliott. Beyonce, a ten-time Grammy winner, is also arguably the single hottest teen icon in the world today. As you can imagine, we view this as a tremendous opportunity to be highly visible at venues that are laser targeted to our consumer base. During the holiday season, we expanded our sponsorship of the Jingle Ball concert series to include Dallas, Miami, and New York; in conjunction with the top pop radio stations in each of these markets. Our enter-to-win-tickets store events were enormous customer draws and they were made even more effective when tied into special meet and greet opportunities, such as the chance we gave customers to meet Nick Lachey and Jessica Simpson in Dallas.

This was also a particularly strong period for spotting the celebrity A-list buying and wearing Steve Madden shoes. Kid rock wore Steve Madden in a recent video. Christina Aguilera had specially-made shoes to wear to the VMAs. Alicia Keys wore our shoes while performing for our troops in San Antonio. And Beyonce Knowles wore specially made Steve Madden shoes while performing the National Anthem at the Super Bowl.

These highlights, in addition to our numerous, and continuous, retail store promotion events and our distinctive print and outdoor campaigns speak to the strength and focus of our public relations and marketing team. Based on the enormous brand recognition, they have generated, we intend to support these initiatives even more aggressively in 2004.

Turning now to our debt-free balance sheet. At year-end, our cash, cash equivalent and marketable securities were $85.7 million. Inventories were $23.9 million, $4.4 million higher than last year; due to the addition of new divisions, hot at-once items that were in transit in December, and early spring arrivals particularly for our retail division. Our inventory turned 9.2 times during the year. We believe that wholesale and retail inventories are lean and current; and we continue to cautiously manage our planning, sourcing, and shipping processes as we move into the new year. Factored and accounts receivable was $33 million. Working capital was $105.1 million. Total stockholder equity was $159.2 million. Book value was $12.05 per share based on the number of shares outstanding as of 12-31-03, up from $10.19 per share last year. At December 31, '03, cash per share was $6.49. Total diluted weighted average shares outstanding totaled 14.1 million during the year. Thank you. And now I would like to turn the call back over to Jamie.

Thanks, Richard. To summarize, 2003 was a year during which we took a variety of important steps to evolve and diversify the business. During the year, we layered in two new divisions, UNIONBAY and Candie's, to broaden our product offering and support overall expansion of the company for the long-term. Plus we took steps to widen our reach and broaden the distribution of our brand even on a global basis. One important example of this is our entry into additional international markets with the launch of Steve Madden Footwear in certain countries in Europe, through a distribution agreement with Group Royay. However, 2003 was challenging. Not only did competition in the market intensify but, in addition, trends in the footwear industry shifted; making 2003 a transition year of sorts for Steven Madden, Ltd. as a whole. In particular, during the year, our core customer changed the focus of her fashion direction from traditional casual base into broader categories including dress.

Additionally, as previously stated, we aggressively responded to the customers' strong demand for at-once, wear-now fashion items. That said, we are proud of the fact that given our nimble operating model, and our commitment to identifying interpreting demands and trends, we were able to change with her; and this enabled us to post solid sales overall. Simply stated, at the same time of sustaining the lead position in our core casual space, and without divorcing ourselves from traditional Steve Madden looks, we evolved the Steve Madden brand in response to the demands of our customers. By introducing updated more feminine styles, among other things, we initiated a diversification of our core business to meet the shifting trends; enhancing our uniqueness and visibility in the marketplace. Our willingness and ability to execute this transition with edgy and cool product across broad categories is what we believe differentiates our company, and will lead to our continued success over the long-term. However, as our experience in the fourth quarter illustrates, this transition did not, and will not, come without a degree of sacrifice or growing pains.

Following the close of our 2003, and taking into account lessons from the fourth quarter, we carefully re-evaluated our internal projections for the current fiscal year. As we look ahead to 2004, we are cautious about our prospects during this ongoing transition time, particularly as we integrate new divisions and continue to shift into nontraditional or new categories in the fashion footwear landscape. There are three factors that have an important impact on our current overall outlook for this year, this 2004 year.

First, as the fourth quarter showed us, while we are in large part successfully testing and reacting to new trends, the entry into new categories is putting additional competitive pressure on us to a greater extent than that which exists in our core casual space. Not only will we face greater pricing pressure by competing more directly with certain other players, but we anticipate the environment will also remain demanding from a mark-down perspective on the wholesale side as we cycle into new categories and styles. Second, with the rollout of our new divisions which provide us with diversification, coupled with our expanding categories within our core Steve Madden brands, we expect to incur additional operating expenses such as increased occupancy expenses and, in addition, we have dedicated additional resources to advertising and marketing. While we will stay true to our grass-roots approach in support of these initiatives, advertising expenses which currently run at below industry levels as a percentage of sales may increase in '04; while staying to a discipline level of approximately 3% or slightly higher. Concurrently, in-store hard concept shops have shown themselves to be effective brand builders, and product investments of top whole sale doors; and we intend to selectively invest in more of these throughout the year.

Third, as we have stated many times in the past, we have what we view as the best product people in the industry, something we are very proud of. To maintain this level of success, we will be investing in additional personnel in our existing and our new divisions. Taking all of this into account, we currently anticipate that 2004 net sales will increase in the low digit -- in the low single digits over 2003. And diluted earnings per share will be in the range of $1.35 to $1.40. While 2004 will be the continuation of a positive and exciting transition for Steven Madden, Ltd., during the year we will be continuing to find and execute proactive ways to further build the business.

Specifically, we will be focused on a few key areas. First, on the licensing front, we intend to intensify our efforts for the search for appropriate brand-building opportunities. While protecting the integrity of the brand is paramount, we are focused on finding ways to leverage the significant Steve Madden brand equity we have built and maximize the other income line.

Secondly, we will have a renewed focus on expanding the retail division of our business. We view this effort as critical as retail is a highly profitable portion of our business, it is a great brand builder; and we have a greater degree of control over our destiny in retail compared to wholesale. And in addition, we can react and respond to customer demand much more quickly in this channel and this benefits our results a great deal. We currently plan to open between 8 to 12 stores during 2004. As we said before, this will be based on an expansion model driven by finding A-level locations and maintaining industry-leading productivity.

Thirdly, we will explore opportunities to further diversify our offerings and expand the business, which could potentially include strategic acquisitions. We are extremely conservative in our approach to this process, and we will only evaluate and/or act on opportunities that would compliment our existing businesses and be immediately accretive to the bottom line. So in conclusion, while we are admittedly somewhat cautious as we move forward, we are energized and we remain firmly focused in our task to build the company responsibly and profitably in an effort to enhance shareholder value for the long-term. I hope that this call has been informative, we appreciate your time and your interest, and now we will turn the call back to the operator to take your business questions.

Thank you, ladies and gentlemen, at this time, if you have a question, you will need to press star and 1 on your phone. Your questions will be taken in the order that they are received. If your question has already been answered, you may remove yourself from the queue by pressing the pound key. Also, if you are using a speakerphone, please pick up the handset before pressing the buttons. One moment please while we queue for the first question. We will take our first question from Michael Ryan with Sidoti.

Hi, good morning.

Hi, Michael.

I was just wondering if I could get -- you know, maybe some more color on what your assumptions are based on your earnings for '04 for gross margin and your SG&A?

Okay. Michael, from a gross margins standpoint, we are really not -- we are not moving dramatically on the gross margin line. We're -- we're moving a little bit down from our stated projected goal of 40% down to where a more normalized level that -- that was achieved in 2003.

Okay. So --

That is the gross margin. And what was your second question?

Just as far as SG&A. Are you even on a dollar amount, are you expecting increase over -- about $100 -- $100 million this year? I mean, can we expect an increase from that next year?

We see it getting to about $100 million next year.

Okay. And then in regards to your inventory at the year-end. Was there any clearance items still in that inventory number from the end of the year that would pressure the gross margin in the first quarter?

We felt it was cleaned up dramatically particularly at wholesale and it was current and, to the extent it was owned at retail, it was appropriate and current for -- there was some early spring in the retail number; but nothing that we were feeling was in appropriate.

Okay. And -- just -- last year, first quarter you are anniversarying the Hijo boot sales. I know you have been successful with the Iglou. Is that something that can make up for the Hijo that and a combination of anything? Can you give any color onto that situation?

Yes and even more so, in a certain way, in that it was a little bit more -- a little broader. Similar in some respects in terms of varied item or seasonal, but I think addressing the larger audience. We have done it in -- in a broader varieties of options, and it's coming on top of success in the entire dress category. So there are two pistons firing, as well as an elongated pointy-toe boot season where we got particularly in the northern part of the country some good momentum and long momentum in -- in a pointy-toe heeled boot category for a long winter season. So the answer is, yes, but with a little bit more than what we consider Hijo to be last year.

Okay. Great. I guess finally did -- you mentioned -- you guys are maybe targeting some acquisitions. Is there any category that you are focusing on there?

Well, we are -- we are focused on -- on acquisitions which would be accretive and complement our core business and our brand. So we would take a -- a broad-based approach to that.

Okay. Okay. Great, thanks, guys.

Thanks, Michael.

Take our next question from the site of Scott Krasik with C. L. King.

Yeah, hi, guys. Can you give us an idea of what kind of impact the Sherpa product has on sales in the fourth quarter?

In our classification, we will call it faux fur instead of Sherpa. It started to have a good impact in retail, it had a lesser impact in wholesale. What we were doing is attacking the category aggressively by getting ourselves placed from a sourcing standpoint in late November, selling it in at the December shoe show and delivering most of it really in the first quarter in January; and as much as we could get our hands on frankly in late December. But that was -- it is a timing opportunity. And I don't want to comment specifically as it relates to numbers, but we were on it and enjoying it at retail; and we were on it and trying to get as much as we could in shipped for both very late fourth quarter and early first.

Okay. And then can you give us an idea of -- you know within the percentages of your business, how much, you know, you expect to do in dress this year? I mean, is it going to be, you know, most of the new product going out? I mean, you are not going -- especially in the younger set, you are not going to completely abandon the chunky clunky?

No, the idea is to expand by category without abandoning anything that historically has been our strength. However, we are needing to aggressively go after the categories that are trending with the young customer today, and today that category includes dress. So without commenting as a percentage, I am going to go where my customers are telling me to go.

And then I guess just lastly, maybe if you could compare, you know, in the past and then also going forward, are there differences, you know, what you are targeting for your wholesale customers versus what you are going to sell in your own retail stores?

Well, there always are differences because retail includes a much broader array of assortment, and including in that assortment are -- are an array of test products. So the answer is, you know, we still rely on retail as a very, very strong indicator for our wholesale assortment mix. So test and react is still very much alive, and it is part of the reason that we were able to so quickly evolve the brand to where the consumer was wanting to see our product. That will not change.

Okay. Thanks very much.

Our next question comes from Sam Poser with Mosaic Research.

Good morning. How is everybody? Question on Candie's. I mean with your -- with the low single-digit increase for 2004, I mean, that -- and -- and how much Candie's revenue do you see happening in 2004?

Sam, rather than go division by division and we have seven wholesale operating divisions. Some are going to be dramatically increasing, Candie's is one of them. What I would rather say to you is that it -- it is part of the overall mix that gets us to a low single digit. So as Candie's increases, other divisions are projected, at least, to either be flat or declining. That is as much -- as far as I would like to go now. We have it very detailed in our internal plans, but all of this can be -- can change and can tweak; and in particular, as it relates to Candie's, it is reliant on the success we expect to have on the spring product that is being delivered to retail now.

Okay. And then your retail -- and on your retail stores, you found your business has gotten better lately it sounds like because of the new product that has hit the stores. Would that be a reasonable assumption?

Yes.

Yes.

And to -- so you are -- are you going to guide -- are you going -- can you give any more color on the retail business for the year?

For the year?

For 2004, going forward, guidance.

Mid single. Growth.

And if you were to say in -- in the wholesale division, you know, which areas -- which of those basically need the most, you know -- that you feel the most comfortable with and those that you think are going to be the most challenging businesses for the year. Can you give us some color there?

In the -- I don't quite understand --.

Between Madden Women's, l.e.i., men's, and so on. Can you sort of, you know, say where -- you know, where your highest expectations are and where -- where you might face some issues? Just sort of in a general sense?

The issues will be in l.e.i. and in Men's. The highest expectations are in Steven. And I would like to leave it at that.

All right.

I would also say Candie's on the expectation side.

Do you think -- with the dress product, have you made -- on a scale of 1 to 10, where do you think you are in sort of switching gears to get into that -- you know, with the sort of more tailored looks that are coming around, where do you think you are in that transition?

In which division are you asking?

I mean, as you said, it really ran through, even in the l.e.i. you said -- said earlier even that was getting slightly more -- less chunky clunky. And --

Yes. You know, it's a wave, Sam, as you know. Discovered at retail, maximized at retail first, followed by Steve Madden wholesale, and now being enjoyed, I think, at retail in our wholesale customer base, and -- and being introduced to -- and appropriately so as the customer accepts it further, you know, back in the -- in the cycle at the mid-tier channels where l.e.i. is distributed. So, yes, as you can see from the product at WSA, it's -- it's trending much more tailored looking, less chunky and clunky and more colorful. That an important aspect because that is one of the things that is trending right now is color and detail.

Great. Thanks, Richard.

Okay.

Our next question comes from Christina Furio with Daulton Garnel.

Good morning. I have a couple of questions on the l.e.i. business. First, given it was such a strong profit contributor this year, and it has been sustaining itself, like revenues and profit have been on the incline versus some of your other major businesses. I am wondering how you offset that weakness next year, now that you are saying it is trending down? And then, also, question as to given some f the announcements recently about licenses being taken inhouse or purchases, what you think of the likelihood of you being able to keep this business is a couple years out?

As it relates to the trend?

Yes.

I think it -- it is dependent on a couple of things. We are addressing the trend from a product standpoint aggressively, and if the consumer is as -- as accepting of the change as quickly as the Steve Madden wholesale customer did. I think we could -- we could stem the projected challenges quickly. A lot of it depends on how aggressively retailers are going to be -- you know, l.e.i. wholesale customers are going to feel confident that they can move l.e.i. away from its historical clunky chunky brown and black into a lot more dressy, a lot more tailored, flatter, pointy toes, heels, dress. You know, it's a much more diversified opportunity, as long as our wholesale customers accept it and their customers, in turn, respond; and part of what our conservative projection on l.e.i. is that until we see that occur, we can't say that it is going to happen for sure. But if it does, we will certainly be on it and as anyone that saw the product at WSA can attest, we are -- we are showing it aggressively and moving there as fast as we can. In terms of the duration of the agreement, I think -- Jamie, just jump in, we are out until October --.

September -- yeah, September 2006. Is when the agreement ends.

But -- will you know before then if you are going to be able to keep the license?

I -- I wouldn't know. I mean, we are assuming that the agreement on it's face ends in 2006, and that is when it is going to go back to the licensor. So, I can only accept what I have at face value.

Okay. Thank you.

Your next question comes from Sid Nicarmi with Royal Capital.

Hi, good morning. A couple of questions. First on the retail side. Comps were down this year. What are some of the levers or opportunities for positive surprises next year? What do you see needing to happen to sort of regain the comps in the positive direction?

I think it's -- it's summed up in the word diversity. If we continue to jump on the trends, and we have. Retail is the first place where -- the leading indicator, if you will, of where our business is going, and we have been doing that early first quarter quite successfully, and our consumers have responded. So I think that the opportunity is always there, but it is very -- it's -- it's a -- it's a tight window of opportunity. You have got to be there very, very quickly. You don't want to miss the trend and you don't want to be on it too long, because then you are liquidating the same inventory that you jumped on. So it's a big challenge. It's -- it's the same challenge that has always been there, but I think it's more accentuated today as the customer shifts around very quickly; but we feel confident that our formula and our model are well-positioned to address those needs. And we are able and capable to turn around our comps all the time.

Okay. And then with regards to the EPS guidance for next year, have you assumed the same sort of year-end fully diluted shares and tax rate?

Tax rate, yes. Diluted shares? I am going to take a look. I think they are slightly higher.

Okay. And then the final question is, with the large cash balance you mentioned potentially an acquisition candidate, as well as are you considering repurchases as well?

Well, we are always -- we are always looking for ways to enhance shareholder value, and we do have authorization from the board for the buyback; and we will continue to remain optimistic -- opportunistic about it. It is something we always look at.

Okay. Great, thanks very much. Bye-bye.

Our next question comes from Mike Onguy with IBIS Capital.

My question is regarding your agreement with Candie's, is there a scaling royalty agreement in terms of percentage of sales? And my second question was who are the customers of Candie's -- I mean I know you have a wholesale business there, but can you give me some color there? Thanks.

We can't comment on the -- on the royalty arrangement. We are confidential on that.

Okay.

It is not -- I think I can say that it is not anything that is not conventional. As to the distribution channels, we are currently in department store, national department store chains, better specialty; and we are working on international distribution as well.

When you said Candie's business is dramatically increasing, can you give more market color on that? Is it because it is exceeding your expectations or is it because you are starting from a zero-base or something like that?

Starting from is a zero-base.

Okay. All right. Thank you.

Okay.

Our next question comes from John Shanley with Wells Fargo.

Good morning. Richard, I wonder if you could give me a little bit more information on the retail side of your business. The 8 to 12 new units that you may bring on board this year. Are they about the same square footage as most of your existing portfolio? And also, what would that bring you to in terms of total square footage by the end of the year?

John, some of the stores that we are looking at this yea,r that we feel confident that we will open will be street deals. And invariably the street locations are a little bit bigger. So there will be some stores coming on-line that will have bigger square footage in terms of the total square footage.

Yeah, what I would like to do, John, is first add to what Jamie said, which is this is in anticipation of -- of, you know, late '04, '05 and in the future moving a little more aggressively into accessory product and licensed product opportunities so that we have a footprint that can accommodate them. As to your question about total square footage, for the year-end '04, what I would like to do is give -- I have the stores but I don't have the square footage front of me. I would like to tally it up and give you a call offline if that's okay.

Where did you wind up with square footage at the end of '03?

Arvind, do we have that?

Okay, you can get back to me with that as well.

We have it --.

We will call you back.

Okay. Then also I had a question, Richard, on the -- coming out of WSA, what -- can you give us a little bit more sense in terms of the junior component of your wholesale business, where the thinking is in terms of your key department store and specialty store customers? Are they increasing, staying the same, or decreasing their open to buy commitments for the junior product category?

We have never really had a pushback on -- on the open-to-buy or receipt dollars. What it is all about in juniors is if the product is fresh, and the consumer is responding, and you are a junior buyer, you will find the receipt dollar. The trick is holding on to enough receipt dollars to respond to what she's reacting to immediately at retail. So, you know, in the junior space, it's -- it's not about committing up front, it is about having dollars that need to be committed when the consumer responds. I mean, this -- this fleece lined or faux fur or, you know, that was something that happened late, but everybody needed to find the dollars to support it, otherwise they missed the business.

Right. Are they -- do the buyers for the junior products seem more optimistic as this WSA than they may have in August and the February of '03?

Yes. And it is based on -- it is based on performance at retail of new products.

The product is selling at retail, is that what you are saying?

Yes.

Okay. And the last question I had, Jamie, you mentioned there is a share repurchase authorization. What is the amount of shares that are involved in that authorization?

Was it --

How many shares are you authorized to buy back if you were going to go ahead and do that?

I believe the authorization is for 2 million shares.

Okay. Great. Thanks a lot. I appreciate it.

Our next question is a follow up with Scott Krasik, C. L. King.

Two quick ones. The first one did you guys buy back any shares in 2003?

No.

No.

Okay. And then -- I guess I am just a little confused. I mean you talk about that you have the business model that you can get product out quickly, and you can -- you know, adhere -- adhere to the trends, so you can switch over to the demand for the dress but then you put language in your release saying, you know, demanding markdown environment. Are you saying that the product that you are going to be putting out will eventually have to be marked down? Or will that come from the fact that wholesalers won't take the dress product? I guess I am just confused about, you know, where that is coming from.

It's a fair question. The issue is really the movement -- aggressive movement into new categories that have not been our traditional strength. When that happens, you are now in a different playing field. That has competitive players already entrenched -- already entrenched at certain retail price points that force us to find our niche within, not only the fashion side, but also the price point side. It is not as wide open space as get it out there and charge what -- what -- whatever the top price that you can possibly get. So there's an initial competition that relates to the movement into broader product categories. And related to that is a very competitive, overall landscape as it relates to department store margin demands. And that is something that we share with all of our competitors. So as a combination of those two things, is why we are feeling that we need to be responsible in -- in communicating that and also making sure that that's reflected accurately in our projections.

I guess, have you gotten any feedback from wholesalers that -- you know are just saying, look, we like chunky clunky from you and, you know, for whatever chunky clunky we sell you are our guys; but we don't want to take the dress stuff?

Well, what happens is -- it's not that they don't want to take it, it's that the clunky chunky is trending down so it's appropriately being bought down; and the dress has a competitive vendor structure already in existence. So you are -- you are proving yourself first, and then as your average selling prices gain market share, you gain receipt dollars or open to buy. So it is a prove yourself first in new categories, and then grow market share in those new categories. It's not instantaneous. The customer has to vote that you are a dress resource, and once that happens, the receipt dollars generally flow.

I guess how pleased are you with wholesale's response to newer, dressier, you know, more fitted tailored product.

Very pleased.

Very pleased.

Okay. Okay, thanks, guys.

We will take our next question from Mike Onguy with a follow-up from IBIS.

I just wanted to ask are you pretty happy with Candie's so far in terms of your business there? And is it exceeding your expectations?

Well, let me just say that we are very comfortable with the team that we have in place, and we are confident that the team will execute on the strategy that we have in place.

Okay. All right. Thank you.

John Shanley, if you are still listening, the assumptions on our dollars per square foot are based on a square footage of 138,528 square feet.

Once again, if you do have a question press the star and 1 on your phone at this time. We will take our next question from Lauren Romeo from Aroysan Associates.

Hi. A couple of questions. First, can you comment on your free cashflow expectations for '04?

Lauren, we couldn't hear you. Could you repeat the question?

Can you comment on your free cashflow expectations for 2004?

Yes. Free cash flow -- net -- net cash provided by operating activities? $7.9 million for '03. And our projection, roughly $10 million.

Okay. And what will cap ex be?

Cap ex, $7 million.

I am sorry.

Seven million dollars.

That's what it was this year as well?

I am sorry?

I think it was slightly less than that for this year.

Okay, can you hear me?

Yes.

Okay. I guess -- just going back to this issue of the cash. Jamie, I think on the last call, just looking at the transcript, you had said that, again, the board is considering a lot of alternatives and the transcript indicates you had said you -- you would be in a better position to report this quarter in terms of the plans that you have for the cash. And I haven't really heard anything different than what you guys have said over the last several quarters in terms of your cash uses. You look at the stock where it is valued today.

You could use half your authorization and $20 million, and buy back stock and still have, you know, $60 million in cash, you're going to be free cashflow positive this coming year, and you have no debt; so you are not hamstrung if you do that to go and make acquisitions if that's -- you know if you have those accretive ones on the radar screen. So I guess I am just puzzled as to what point you guy also decide that you are going to make better use of this cash in terms of earning a good return for shareholders?

Well, first of all, I -- I mean I think we all agree with you. I think that we -- we do have a lot of cash and the board is -- has in the past and is continually looking at various things to -- to enhance shareholder value. So what we said on the last call does, in fact, continue forward and I think we have taken an aggressive view toward some of the things that we enunciated in the call. Certainly with respect to licenses and acquisitions, all of which require money. We are taking an aggressive view of all of those things, as well as the buyback. I mean we have -- I have said this several times; I mean, we do remain opportunistic about the buyback. Specifically, you know, can I tell at what level it is going to occur? No, I couldn't.

Okay. Thanks.

Once again, if you do have a question, press the star and 1. And we will take our next question from Mike Onguy. Go ahead.

What are your expectations for Candie's for '04 and '05 revenue expectations.

We don't disclose specific revenue expectations by wholesale division.

Okay. Thank you.

We will take our last question from Sid Nicarmi from Royal Capital.

Follow up on one of the cashflow questions. And that is if -- if you are sort of looking at net income to stay roughly around $20 million again, and I think you said that cash flow from operations was going to be $10 million. What accounts for the differences if sales are flat, why would working capital need to increase that much?

It's increase on accounts receivable, inventory --.

Right, but I guess if the sales are flat, are you saying that -- that the inventory turns are going to drop or --.

Well, the turns -- the turns will drop.

Slightly drop due to our new division

Okay, so the newer divisions will have slower turns until they ramp up?

That's right. And as retail also has slower turning inventory.

Okay. And so -- since -- the retail growth might be a little higher than the wholesale.

Yes.

This year with lower turns that will require more working capital.

That's correct.

Great. Thanks very much. Bye-bye.

There are no further questions. Please continue with any closing comments.

Okay, well thank you for participating in the call. We will speak to you again in a few months. Thanks.

Ladies and gentlemen, that does conclude our conference call for today. You may all disconnect and thank you for participating.