Apex Global Brands Inc
Q3 2016 Earnings Call Transcript

Published: 11 Dec 2015

[Operator:]

Greetings and welcome to the Cherokee Inc. Third Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host Ms. Patricia Nir. Thank you. You may begin.

[Patricia Nir:]

Thank you. Speaking today will be the Company's Chief Executive Officer, Henry Stupp; and Chief Financial Officer, Jason Boling. You can also find accompanying slides for today's call on Cherokee's Investor Relations website. Before I hand the call over to management, please note that on this call, certain information presented contains forward-looking statements. Certain statements contained herein may also contain Forward-Looking Statements for purposes of the Safe Harbor provided by the Private Litigation Reform Act of 1995. When used the words anticipates, believes, expects, may, should and similar expressions are intended to identify such forward-looking statements. Forward-looking statements included in this conference call involve known and unknown risks and uncertainties that may cause actual results, performance or achievements of the company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. A further list and description of these risks, uncertainties and other matters may be found in the Company's Annual Report on Form 10-K for the fiscal year 2015 and the Company's quarter report on Form 10-Q. Given these risks and uncertainties, you should not place undue reliance on forward-looking statements as a prediction of actual results. The Company disclaims any intent or obligation to update any of these forward-looking statements contained herein to reflect future events and developments. The Company's earnings release is posted on the Company’s website at www.cherokeeglobalbrands.com. And with that, I'll hand the call over to Cherokee’s Chief Financial Officer, Jason Boling.

[Jason Boling:]

Thank you Patricia. Good afternoon and thank you for joining us today. I’ll begin today's call by discussing our third quarter fiscal 2016 financial results. I will then turn the call over to Henry to speak in further detail about our brands and partners before we open up the call to your questions. GAAP revenues for the third quarter were $8.1 million, compared with $8.7 million in the prior-year period. Overall, the revenue decrease of $0.6 million is primarily attributable to three factors. First, we recognized zero revenues for Cherokee and Liz Lange-branded products in Canada due to Target's Canada bankruptcy and its subsequent exit from the Canadian market. This business has been replaced with a new, direct-to-retail license agreement with Sears Canada for a comprehensive program that includes adult, children's apparel, footwear, accessories and home products for the Cherokee brand and ladies sportswear, maternity and plus-size clothing for Liz Lange. Both Cherokee and Liz Lange products will launch in Canada during the spring 2016 season. Second, we recognized zero revenues from Tesco in the UK and Central Europe. The UK business has been replaced with a direct-to-retail license agreement with Argos that launched at the end of the second quarter of this year. And third, the transition of the Tony Hawk brand in Canada from a wholesale licensee to a direct-to-retail license agreement with Walmart. We expect sales and royalties from Walmart to begin with the fall of 2016 season. We also experienced currency headwinds during the quarter primarily from the Japanese Yen, South African Rand and Mexican Peso, which negatively affected revenues in the quarter by approximately $200,000. In total, these factors offset revenues by nearly $0.8 million versus the prior year period. Partially offsetting this revenue decline were international revenue increases for the Cherokee brands in Asia. Importantly, we encourage to our recent large-scale partnerships and acquisitions, which we believe will be important drivers of future growth. Specifically, we are pleased with the initial success of our Cherokee adult and children's product in Argos stores, catalogs and online in the UK and Ireland. The positive impact and reviews of the Cherokee brand at Argos in Western Europe has led to increase demand from new additional retail and wholesale partners for Cherokee branded products throughout year. And recently we entered into our new wholesale license agreement for the Cherokee brand with [Suborn] for adult and children apparel and accessories for certain countries in Western and Central Europe. These markets were launched during the fall 2016 season. For the first nine months of fiscal 2016, revenue decreased 2% to $26.8 million as compared to $27.4 million for the same prior year period. This decrease was due to the aforementioned transition that we haven't counted. This transitions that retail are link to new more profitable platform partnerships. Selling, general and administrative expenses were $5.6 million, or 69% of GAAP revenues, compared with $4.9 million, or 56% of GAAP revenues in the prior year period. The $700,000 increase in SG&A was due primarily to transaction costs associated with the acquisition of Flip Flop Shops and intellectual property protection costs from a recent legal settlement. These acquisitions in IP protection cost decreased our diluted earnings per share by approximately $0.05 in the quarter. Looking ahead Cherokee global brands has ongoing discussion with strategic acquisition targets that we expect would fully leverage our 360 degree platform. Net income was $1.5 million or $0.17 per diluted share, compared to $2.3 million or $0.27 per diluted share in the prior period. Again, the deal on IP protection costs discussed above, reduced diluted earnings per share by approximately $0.05 for the quarter. On a year-to-date basis, net income totaled $7 million or $0.79 per diluted share, compared to $8.2 million or $0.96 per diluted share in the first nine months of fiscal 2015. The deal on IP protection expenses reduced earnings by approximately $0.05 per diluted share. Operating income was $2.5 million or 31% of GAAP revenues versus $3.8 million or 44% of GAAP revenues in the prior year period. Our year-to-date operating margins totaled 43%, compared to 46% in the prior year period. The deal in IP protection expenses decreased operating margins by 6% for the quarter and 2% for the year-to-date period. For the quarter ended October 31, 2015, we recorded tax provision of $802,000, which equates to an effective tax rate of 34.2% compared to $1.3 million or an effective tax rate of 35.8% in the prior year period. Total cash and cash equivalents as of October 31, 2015 were $5.7 million compared with $7.6 million at January 31, 2015, which reflects $6 million of cash use towards the $12 million purchase price for that he acquisition of Flip Flop Shops. In conjunction with the acquisition of Flip Flop Shops, the company amended its credit facility with chase for an additional $6 million. Cash flow from operations was $8.8 million for the first nine months of fiscal 2016, compared to $7.6 million for the prior year period. Stock-based compensation expense for the first nine months of fiscal 2016, totaled $1.6 million compared to $780,000 from the prior year period. The increased was due to the stock price of the grant date being higher than that of the prior year. We remain in a strong financial position as we actively explore additional strategic brand acquisitions and support the organic growth of our global business. Thank you all for your time, I will now turn the call over to Henry.

[Henry Stupp:]

Thank you, Jason and thank you everyone for joining us this afternoon. In my remarks today, I will discuss the apparel, retail and brand licensing sector. Review of our latest acquisition update you on our organic growth initiatives as well as brand development. We’ll then open the call for questions. This year has been a challenging period for the retail sector beginning with the West Coast port slowdown and generally lower retail sales through the fall season. Despite these challenges I am pleased that Cherokee global brands continues to deliver profitably, while continuing to evolve our business model through organic growth and new brand acquisitions. Ensuring financial discipline and maintaining strong balance sheet will remain a key priority as we focus on growth with existing brand and as we continue to pursue acquisitions. Since I joined a little over five years ago, we have transitioned the business from dividend company to a growth vehicle by unlocking the value associated with our core brand and have taken a selective and discerning approach to strategically acquired brand and businesses. This has resulted in a more diversified retail based in all major global markets. The agility of our business model and our global scale allows us to swiftly forage new platform partnerships around the world and successfully navigate the transitions that are inherence within our industry. For the long-term, transitioning businesses way from legacy relationships gives us the opportunity to establish new, more profitable partnerships that full leverage our platform. We remain very confident that we shall continue to see progress to the globalization all of our brands and businesses over the near and long-term. I know that we are positioned well for even greater future success as our platform and relations have been embraced by our partners. Consider that in the past two quarters, our recent large-scale brand partnerships and acquisitions has set the stage for growth as retailers such as Walmart and Sears in Canada, Argos in the UK and Ireland invested in multi-category, and in some cases, multi-brand programs with us. Our acquisition of Flip Flop Shops Stores and Everyday California promise to further accelerate our global reach and relevance. Bottom-line our unique approach how we face this transitions in our business are teeing up a very bright future for Cherokee Global Brands. It is important to remember the specific geographies and brands which reduced revenue in the UK and Canada have been replaced and will begin to positively impact financial performance in the quarters to come. The acquisition of Flip Flop Shops, a category leading franchise retail chain selling the hottest brands and latest styles of Flip Flops and casual footwear aligns perfectly with our strategic plan in zero inventory, no manufacturing risk business model and will serve as a great platform for future organic growth. Flip Flop Shops has approximately 100 free-standing franchise stores in the United States, Canada, Caribbean, Middle East and South Africa with approximately 100 additional stores under development. Since we acquired Flip Flop Shops we already open six stores and expect to open additional eight stores throughout the remainder of fiscal 2016. We have further strengthened the product assortment through partnerships with Under Armor Puma and have launched several new marketing initiatives. In addition, we intend to further increase awareness of brands in our portfolio such as Everyday California, Cherokee, Tony Hawk and Sideout through marketing partnerships that will enhance the penetration of our brands while establishing new revenue streams. Lastly, our business development team has already entered into advanced discussions with big retail to open shop-in-shops in the U.S., Canada, India, Mexico and Western Europe. We anticipate first of this new partnerships to be announced earlier in the New Year with the actual shop-in-shops launching as early as the first quarter in fiscal 2017. Now I would like to take a moment to speak about the future of our namesake Cherokee brand in the United States. I will then provide an update on our other global brand and new partnerships. Since we announce that we shall be transitioning the Cherokee brands during fiscal 2018, we have identified and have initiated discussions with several large-scale retailers and wholesalers including the digital retail platform. All have expressed interest in Cherokee brand based on its multi-category relevance and extremely high consumer awareness. We intend to rollout a group of strategically aligned licensing partners who will resell benefit from strong existing distribution. Interest on the wholesale and retail community has been strong and we have already started reviewing inbound licensing proposals from several quarters. We expect that the broad range of Cherokee lifestyle branded products will be available to consumer starting spring 2017 in order to fully satisfy the demand that has been cultivated over the past four decades, fortunately for us and despite the tough retail environment and lackluster results of many of our peers .S. sales for the Cherokee brand in the U.S. has remain strong. We had a positive back to school season with quarterly revenues remaining consistent with the prior year period at $3.5 million. Year-to-date revenues for the Cherokee brand also maintain system with the prior year at $12.5 million. The Cherokee brand continues to resonate with the U.S. consumer. We maintain exceptionally strong brand awareness on our qualitative research indicates that a large majority of U.S. consumers know the Cherokee brand. We have spent the last few years refining our 360 degree platform to allow for better integration with our licensing partners. This platform allows us to do the heavy lifting so that partners can confidently embrace an approach the future. Retailers today are using the capital resources they have to build content, technology in more efficient distribution platform. From our experience, we know that in this new world of retail cut and paste simply won't cut in. We are called on to support our partners by delivering unprecedented value where speed market or agility is key. We are creating deeper, more impactful relationships where we can plan actable in driving brand sales. And with any new or existing partnership, we want to able to reflect the new world of Cherokee global brands. We have net with over 40 perspective partners in a very short amount of time and we are carefully identifying and assessing the right partners that want to talk advantage of our platform. We will be strategic and selective and we are in the process of reviewing prospective proposals for all major product categories including adult and children apparel, accessories and footwear and home categories including bed, bath, kitchen and room decor. We expect to announce our new U.S. licensing platform partnerships in the New Year and we remain very optimistic with our progress to-date. Now turning to U.S. royalty revenue for the Tony Hawk and Liz Lange brands, specifically. Revenue for Tony Hawk branded cloths totaled $1.2 million for the third quarter. We continue to work closely with cloths team to ensure continued successful sales and marketing of Tony Hawk products in the future. Our recent announcement relating to the addition of Walmart Canada into to the Tony Hawk brand has created significant excitement and we remain very confident that our Hawk business is ready to scale further. Our Liz Lange brand experienced a very positive quarter in U.S. with royalty revenue up 7.3% at Target. In addition, HSN’s strong support of the Liz Lange brand and their direct on air involvement has helped to further increase to Liz Lange brand awareness throughout the U.S. Now I would like to talk about our few of over many new programs that are launching and the organic growth potential around world. In conjunction with the acquisition of Everyday California, we have already signed two licensing deals with additional licensee under discussion for the rights to manufacture and sell Everyday California branded products in the U.S. and Canada as well as South and Central America, Europe, the Middle East in Africa. We have already secured retail distribution with products launching in early spring 2016 for adults and kids apparel and new categories including backpack bag, luggage,[indiscernible] accessories. Through these new licensing partnerships, we have strengthened the brand's presence to further leverage additional licensing relationships. We are excited for the launch and growth potential of this very relevant brand. Turning over to Europe. In August, Argos our partner in the UK and Ireland launched an online in-store and catalog adult and children assortment of Cherokee branded apparel and accessories. During the initial launch, the online functionality of their website caused some disruption related to inventory supply and allocation, which we believe are now on track. Argos has been a very committed partner and a response and demand for Cherokee branded products these past two months October and November have been quite strong. The customer has been very receptive and the consumer product reviews have been exceptionally positive. The increased recognition to Cherokee brand at Argos led to our license agreement with [Suborn] to selling wide assortment of men's and women's and children's clothing accessories in department stores, specialty stores and hyper market in countries throughout Western and Central Europe. And we are currently in advanced discussions with additional European retail partners and look forward to leveraging Cherokee's already established, high consumer awareness in European marketplace and hope to announce some new partners soon. In Canada, store Sears is fully leveraging Cherokee's 360 degree platform and we are thrilled with the scope of their commitment to the Cherokee and Liz Lange brands. We believe that this will further increase our profitability with sales and royalties commencing during the first quarter of fiscal 2017. Sears Canada will be launching the entire line of Cherokee's family lifestyle products including men's, women's and children's fashion, footwear and accessories. Sears will also be unveiling an expanded Liz Lange offering including maternity, active wear and plus-size clothing. The Liz Lange brand achieved quick success in Canada and demand for Liz Lange products remains strong. We are anticipating a very bright future up North. In addition, we recently entered into a license agreement for the Tony Hawk brand with Walmart for Canada. This is truly a game changer of Cherokee global brands and we look forward to collaborating with one of the largest and most innovative retailers in the world. Walmart Canada will fully leverage our propriety 360 degree platform and will benefit for innovated design of street wear products or agile sourcing and marketing and our ability to quickly scale. Walmart Canada's customers will enjoy unprecedented access to the full Tony Hawk brand experience, including a broad assortment of Tony Hawk signature apparel, accessory and footwear categories. For young men’s and boy’s sizes four through 20. The form back-to-school 2016 launch will be supported by fully integrated marketing campaign that includes digital and social media reach as well as national PR and promotional events. Now turning to international retail sales for the Cherokee brand in more detail. During the third quarter, we reported strong sales in Asia where Cherokee branded products performed very well at both Nishimatsuya in Japan, RT-Mart in China. With retail sales up 29.6% and 11.2% respectively year-over-year in local currency. The Cherokee brand is also expensing continued success, at Pick ’n Pay South Africa, where retail sales improved nearly 73% year-over-year in local currency. In India, the Cherokee brand continues to see success in Unlimited, previously Megamart where retail sales improved 6.5% year-over-year in local currency. Also in India, we launched our in-house developed Coles brand which Reliance Trends, the consumer reaction was simply terrific and we are expanding the product assortment by add a new category and we started marketing the Point Cove brand to perspective new licensing partners both in the U.S. and abroad. Latin America is another global market where the Cherokee brand continues to see strength. We also made great strides at Tottus, Peru and Chile where retail sales climbed approximately 14% to 22% in local currency, respectively over the prior year period in local currency. However, retail sales for the Cherokee brand at Comercial Mexicana were down 4.9% over the third quarter of fiscal 2015 due to the pending merger between Comercial Mexicana and Soriana Mexicana. Now that the merger is complete, we have met with representatives from both parties and remain confident that we will achieve incredible growth and category expansion that Soriana operates in excess of 650 locations, which will be combined with the 156 Comercial Mexicana operation. We are pleased with the new partnerships and brands that are being introduced into a global retail platform during fiscal 2016. We are committed to developing and executing gain store strategic plan and carefully securing new partnerships for the Cherokee brand in the United States. We will continue to promote the organic growth of our global portfolio brands while focusing our media attention to the U.S. transition from a current retail partner. We also intend to continue identify and pursue strategic acquisitions for our portfolio. Thank you again for your time today and support of Cherokee Global Brands. We look forward to speaking further about our company’s developments on our next quarterly call. And we’ll now open up the call to questions.

[Operator:]

At this time, we’ll be conducting a question-and-answer session [Operator Instructions] Our first question comes from Eric Beder with Wunderlich Securities. Please state your question.

[Eric Beder:]

Good afternoon. Hi guys.

[Henry Stupp:]

Hi Eric.

[Eric Beder:]

Hi. Could you talk a little bit about - I know you mentioned that you are talking to tones of people really in terms of replacing Target. I know you talked about this before, but how important is it now for exclusivity among Target, among the Cherokee brand in America. Is that still a big thing among your partners or is it more likely kind of some [indiscernible] that people are using of multiple areas carrying the brand?

[Henry Stupp:]

The basic concept that we’re going to rollout which we’ve seen manage successfully with other brands, specifically other brands that are based with a long history of American heritage is to have a discipline distribution strategy between specialty mid-tier and mass market. Exclusivity can take on many different tax, it could be exclusive for a product category at a retailer, it could be exclusive by the fusion brand with a retail partner or a wholesale partner or it could be just a broad exclusive distribution partnerships similar to what we had with our legacy partner Target. Our approach with respect to Cherokee is to balance and ensure that all categories and that’s the positive reaction that we’ve been receiving is for all categories to make it into retail come spring 2017. We also believe based on other great examples that ubiquity is rising and importance in terms of adding to the authenticity of certain brands and were keeping that in mind as well.

[Eric Beder:]

And when you looking at these proposals, I know that historically Target’s licensing rates were above kind of industry averages, and I assume given the strength of the Cherokee brand that is something that you are probably looking to remedy in the new rounds of contracts here?

[Henry Stupp:]

So just to clarify Eric, you said Target rates were above industry standard, actually they were below…

[Eric Beder:]

I’m sorry but below industry standards, my bad.

[Henry Stupp:]

Yes. So all new deals will be reflective of our royalty rate, it would be commensurate if it was wholesale to what would be an increased royalty rate and then any new DTR deal would be commensurate with any deals that we have done of late. So to answer to your question, we anticipate that the rates will be significantly higher than the contract that we entered into the Target in late 1994.

[Eric Beder:]

Okay and finally what are you seeing in the M&A environments, I mean how is that looking in terms of pricing, in terms of kind of strategic, is the flow there and how should we think about that going forward?

[Henry Stupp:]

Well I think we've demonstrated over the last two years that was picking up the pace on our M&A activity, you can expect us to continue looking at brands and maintaining a strategic approach. I believe that pricing is falling a little bit more into line, given some of the recent development in our peer group. We are seeing some great opportunities, we are exploring several as we speak and we are excited by some of the opportunities that have presented themselves to us. So I think the net-net for us is the addition of the potential addition of new brands, the way we dramatically started expending our brands globally and with new partners combined with where we are heading with the Cherokee brand into the future giving us a lot of comfort in where we have been taking our business.

[Eric Beder:]

Great. Good luck for the holiday season guys.

[Jason Boling:]

Thank you.

[Operator:]

Our next question comes from Jeff Van Sinderen with B. Riley. Please state your question.

[Jeff Van Sinderen:]

Good afternoon everyone. So I guess my first question is a follow-up on the Target license replacement. Just wondering if at this point I know it's still earlier in the process. But any sense of whether mix might fall between wholesale and DTR for those licenses and then just wondering there is a particular niche that you think might lean more toward wholesale and one of them might lean or some of those might lean more toward DTR?

[Henry Stupp:]

First of all thanks Jeff. We are entertaining both right now, we are not going to be specific as it would be unfair to both the partners and be at retail or wholesale that we are talking to. The interest level is high from both sectors, so we will in short order at the beginning of the New Year start announcing our plans.

[Jeff Van Sinderen:]

Okay. And so as far as announcement go, I think you - I’m not sure if you said January or maybe you said early in the New Year, but do you think that those would be announced sort of one at time or do you think it will several announced together or how do you think that will rollout?

[Henry Stupp:]

It's a good question. You can expect us to announce this fleet of licensee at one time and we will do it in groups based on category and size and gender.

[Jeff Van Sinderen:]

Okay good to hear. And then maybe if you could catch a little bit more on Flip Flop Shops, I know we have got number of questions on that since the acquisition. Maybe just touch on the opportunities you see there, how you are positioning to grow that business, I mean I know touched on in your prepared comments, but also maybe when those Under Armor flowing and how you are planning to role some of the Cherokee product, Cherokee branded product in there?

[Henry Stupp:]

Sure, in terms of [indiscernible] strategy team of Flip Flop Shops is continuing to focus on the expansion of owner operated franchise location. Our team is working - our existing global business team has been working with the Flip Flop team to meet with big retail as I am calling it to expand the operating via shop in shops and popup shops. So far we've met and discussed the concepts and had made several presentations with big retail. As we mentioned in our prepared remarks in Canada, Mexico, United States and in India and in the United Kingdom we are extremely pleased with the response that we've gotten. It's not hard to concept for people to understand based on the success that other brand owners like Luxottica with sunglass side or [indiscernible] with JCPenny’s. Now that we've been able to communicate to the street what are plans are and how we plan on rolling it out as a global brand concepts. We are really delighted with the reaction that we gotten and we said in our prepared remarks we expect not only announced, our first partnership very early in the New Year, but it is possible that we will actually have the first retail businesses as a result of this negotiations prior to the end of first quarter.

[Jeff Van Sinderen:]

So actually you saying, when you say prior to end of first quarter you mean you would actually be starting to roll product out of that time?

[Henry Stupp:]

Correct.

[Jeff Van Sinderen:]

That’s great to hear. Okay I'll let someone else to jump in. Thanks very much.

[Henry Stupp:]

Thank you very much.

[Operator:]

Our next question comes from Liz Pierce with Brean Capital. Please state your question.

[Elizabeth Pierce:]

So Thanks good afternoon a couple of questions. In terms of the target situation, so is there any - it's sound you got a lot of things that are perhaps teed up and ready to go, so I would presume that you are going to be ready to - in essence there won’t be any gap right. between when you are ready to roll these out.

[Jason Boling:]

So Liz our expectation is that at the point in time the target fully backs out in 2017 that we’ll have licenses in place that we will be starting to sell product that is our goal, that is what we’ve talked about the entire and that’s what we’re talking about with all of our potential licensees at this point.

[Elizabeth Pierce:]

Okay. So you will basically be ready and then I guess kind of related to that is there going to be any additional need if you have like wholesale DTR et cetera and multi-categories in terms of infrastructure that you will need to add to that for that?

[Jason Boling:]

A lot of the wholesalers that we’re speaking with have a lot of the infrastructure already. So obviously we’ve built our 360 infrastructure that absolutely can support them, we will be actually providing a lot of the design, a lot of the trend pattern and then they can take it and they will be able to run with their infrastructure to put it out into the categories that they are experts in. So we are talking to the category experts in most of the cases.

[Elizabeth Pierce:]

Okay. So even from a wholesale perspective, you don’t feel like you need to add a lot on in terms of your infrastructure, your whole 360, I just want to make sure I understood that.

[Henry Stupp:]

Correct Liz. We believe that the infrastructure we've build. If there are additions of the incremental and will probably related to a further expansion of product categories are currently available. So if we went into for example top of table we may bringing additional designers to expand our home and room decor, but again at the stage with the infrastructure that we've focused on it would be incremental costs increase, nothing material and we are looking best in class makers and retailers. So they can do a lot of the support structure and tap into our operations.

[Elizabeth Pierce:]

Okay. And any kind of backup plans for delays, I mean we all know how things come up unexpectedly. I presume you have got contingencies if something changes?

[Henry Stupp:]

Well we do have a plan, we have looked at it from various angles, we are going to continue with our overarching strategic plan, which is a combination of further organic growth. As we stated earlier, all these new deals are going to start kicking in the upcoming quarter or two, so that’s very positive for us and we expect positive results there. We are delighted by our introduction of the half brand with Walmart and we think that will present a lot of opportunities, especially at a global front in terms of the interest in the half brand. And as we also said in our prepared remarks the reintroduction at Argo as spurred a lot of interest in Europe and in fact our team is over in Europe right now working with several retailers, large-scale retailers in Western and Central Europe dramatically expand our footprint as we head into next year. So the combination of our organic growth, the recent addition and the global rollout of Flip Flop Shops, the increased awareness and interest in Hawk plus any new M&A activity that we’ll understand, will all help support our business into the future and we remain very confident that we will successfully transition the Cherokee business into the future.

[Elizabeth Pierce:]

Okay. And then just lastly in terms of Hawk with domestically with Coles. Can you maybe give us an update on what is going on in terms to perhaps drive that business, get that business into a little bit more of a growth mode?

[Henry Stupp:]

Well the opportunities of brand that are approaching Coles has created more of a competitive environment for us than we’ve had to deal within the past. So there are several brands owners that have presented themselves to Coles. We find that we’re in a good place with Coles, we’re working with Coles, the product is performing, we did lose a couple of younger size categories and some accessory categories, which is what the slowdown was. But on a comp basis, we’re comfortable with where at and we’re looking at various category expansion opportunities and we’re working closely with Coles to address that. So stay tuned, we have a plan there as well, but I’m not going to lay all the cards out at this stage and how we’re intending to grow the Hawk business in United States, but I will say, we have every intention of growing the Hawk business in the United States. Okay. Liz?

[Jason Boling:]

It sounds like we lost Liz.

[Henry Stupp:]

Operator if you want to…

[Operator:]

Absolutely [Operator Instructions] Our next question comes from Nick Meyers with Roth Capital Partners. Please state your question.

[Nick Meyers:]

Good afternoon everyone. I’m on for Dave today obviously. How are you doing?

[Jason Boling:]

Hi Nick.

[Nick Meyers:]

Okay. I'll get away from Target for a little bit. First of all, let’s go on expenses they were a little bit higher than anticipated. To what extent were these costs one-time in nature including the merger charges with Flip Flop and are you able to quantify these? And lastly, how should we think about the run rate going forward?

[Jason Boling:]

Sure Nick so what we did is in the really release we did talk about the fact there was roughly $600,000 worth of expenses relating to both IP protection and the deal cost relating to the acquisition of Flip Flop shops. And that accounted for about $0.05 worth of EPS. And then on a going forward basis, at $5.6 million which included the $600,000 worth of deal cost and IP protection costs, we've been running somewhere between five, 5.3 on normal type quarters. So at this point, I would say right around in that position.

[Nick Meyers:]

Okay perfect [5.3] (ph) okay perfect thank you that helps a lot. And secondly can you talk more about recent deal you signed with Walmart Canada, like how many categories and which ones being in the outset and this compares to Coles, your offering in Coles in the U.S.?

[Henry Stupp:]

This is Henry, it's a much more expanded assortment in Walmart Canada. Its young men's, big boys and little boys, it's all major categories of apparel, accessories and footwear and we will introducing new categories as we move forward with them, but Cole then were weather accessories. We are also launching it with a fully integrated marketing campaign that will be externally promoted, where we can fully leverage Tony Hawks' involvement. And Tony is very excited and he is actually meeting us in a few weeks up in Canada. And we are going to start doing long lead editorial outreach, long lead consumer outreach and we will be working with some local PR firms that we've already engaged to dramatically raise the awareness and profile as the product gets launched with Walmart.

[Nick Meyers:]

Perfect, thanks for the color Henry, I think that’s good for me today. You guys have a good day, thank you.

[Jason Boling:]

Thank you.

[Nick Meyers:]

Thank you Nick.

[Operator:]

There are no further questions at this time. I would now like to turn the call over to Henry Stupp for closing remarks.

[Henry Stupp:]

I just want to thank everyone for joining us today. Jason and I are available to answer additional question and look forward to sharing the positive results of our entire team's efforts as we move into next year. Thank you again and have very great holiday. Bye-bye.

[Jason Boling:]

Thank you.

[Operator:]

This concludes today's conference. Thank you for your participation. You may disconnect your line at this time.