Lifetime Brands, Inc.
Q1 2008 Earnings Call Transcript

Published: 8 May 2008

[Operator:]

Welcome to the Lifetime Brands first quarter earnings conference call. At this time, all participants are in a listen-only mode. Following management’s prepared remarks, we’ll hold a Q&A session. (Operator Instructions) As a reminder, this conference is being recorded today, Thursday, May 8, 2008. I would now like to turn the conference over to Ms. Harriet Freed.

[Harriet Freed:]

Thank you, Operator. Good morning, everyone, and thank you for joining Lifetime Brands’ First Quarter 2008 conference call. With us today from management are Jeff Siegel, Chairman, President, and Chief Executive Officer; Larry Winoker, Senior Vice President and Chief Financial Officer; and Chris Kasper, Senior Vice President, Corporate Development. Before we begin, I’ll read the Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995. The statements that are about to be made in this conference call that are not historical facts are forward-looking statements and involve risks and uncertainties, including but not limited to, product demand and market acceptance risks, the effects of economic conditions, the impact of competitive products and pricing, product developments, commercialization, technological difficulties, capacity constraints or difficulties, the results of financing efforts, the effect of the company’s accounting policies, and other details contained in its filings with the SEC. The company undertakes no obligation to update these forward-looking statements. With that introduction, I’d like to turn the call over to Mr. Siegel. Please go ahead, Jeff.

[Jeffrey Siegel:]

Thanks, Harriet. The first quarter of 2008 was one of the most difficult periods for retailers that I can remember. Given the environment, most retailers cut back on purchases with had a negative effect on our wholesale business which was down by about 10% compared to last year. While it may be premature to say that the worst is over, I can tell you that since early April, our order flow has turned around and as of right now it appears that our wholesale sales for the second quarter will exceed last year’s. As the magnitude of the slump in overall retail sales became apparent, many retailers in effect wrote off the spring season ad began aggressively to focus on the fall. While we expect retailers to continue to be cautious, the ongoing collaborative planning process between Lifetime and our retail partners leads us to believe that we should have a strong second half of the year. This will be driven by a combination of new product introductions as well as very strong promotional offerings that can drive retail sales, especially in the last six weeks of the year. As business slowed in the fourth quarter of 2007 and the beginning of the year, we began working with our key suppliers to develop strong promotional offerings in all of our product categories. As a result, we are in a good position to capitalize on retailers’ fall promotions. As I mentioned in this morning’s release, product innovation is especially important during periods when consumer spending is constrained. When business is tough, retailers rely on those vendors who can offer great products at exceptional values. Lifetime offers both the innovation and promotions they need. With those overall comments on our approach and strategy, let me give you an update on some of Lifetime’s key initiatives. First, we introduced our new environmentally-friendly kitchenware products at the International Home and Houseware Sale in Chicago and the reception was outstanding. Eco-friendly products are one of the fastest-growing, most dynamic sectors of the economy. Our products are made from a bio-plastic blend that contains significantly less petroleum than ordinary plastics. Unlike some other materials, they’re completely safe for use with food, and though they’re dishwasher safe and will withstand years of use, at the end of their lifecycles, the products are also recyclable. Our first products under the EcoWorld, EcoLife, and Pedrini Eco trademarks will be available at retailers in the fourth quarter. After that, we’ll build on our core assortment by offering products in many of our other categories. Our green product lines have a multi-brand strategy so we will be able to be offer it to all of our retail customers at every level. Second, we’re making good progress with our launch of Vasconia brand, one of Mexico’s best known brands. In 2007 we identified the US Hispanic consumer as a fast-growing but underserved segment of the population and we’ve developed a line of more than 150 products targeted to this market. Our product offerings cross multiple categories of business and provide programs to every level of retailer. Placement starts this quarter and has been running ahead of our original expectations. Third, our entry into the fast-growing category of waste management is going well. We’re offering exclusive designs and exclusive features such as child- and pet-friendly locking lids, a line that prevents suction between the garbage bag and the liner, and front and back handles and wheels for easy moving and cleaning. We expect these advantages, combined with sleek styling, competitive pricing, and universally recognized brands, to put us in the forefront of the category. I would also like to update you on the progress we are making in our dinnerware business. In the second half of last year our dinnerware business performed far worse than our other wholesale businesses. New management took over in January and though they were not on board long enough to make much of a difference in the first quarter, they are on track to move sales up considerably starting in the second quarter. Glen Simon, the new division president, has put together a first-rate group of experienced professionals to run the business and they’ve already gained significant new placement for the second half of the year. I also want to give you a quick update on some operational matters before turning the call over to Larry and Chris. In our direct-to-consumer or DTC business, we completed the closing of the 30 stores we targeted because they didn’t make a profit. We expect the closings alone to improve profitability by about $2 million. Our remaining stores are doing well. Same-store sales in continuing locations were up 3.3% in the first quarter and were up about 2% in April. The internet and catalog business was up about 13.5% in the first quarter. The consolidation of our warehouses in Southern California is continuing on plan and we finalized a strategy to improve the efficiency of the York, Pennsylvania distribution center that came with the Pfaltzgrapf acquisition. In addition, our inventory reduction initiative continues to make progress. As of March 31st, inventory levels were at $137 million which is $17 million below the prior year. Chris will give you details on these matters later in the call. The restructuring of the directed consumer business resulted in a $2.9 million non-recurring charge in the first quarter. The consolidation of the west coast distributions facilities forced us to incur an additional one-time expense of $1.5 million. We expect the consolidation of the facilities to be substantially completed by the end of June. We’ve given a lot of thought as to whether we should change our guidance for the full year of 2008 for our financial results. It would be easy to infer from our first quarter results that our year will be disappointing; however, when we look at our current sales trend for the second quarter and how the company is positioned for the fall, we believe that we can make up the shortfall we experienced in the first quarter. As a result, we are maintaining our guidance for 2008. Of course, this would change if the economy were to continue on a downward slope. I’d like to now turn the call over to Larry to provide more details on our first quarter numbers.

[Laurence Winoker:]

Thanks, Jeff. Net sales for the first quarter of 2008 were $98.2 million, a decrease of 5.4% from the 2007 period. Net loss was $6 million or $0.50 per diluted share for 2008 compared to a loss of $1.3 million or $0.10 per diluted share in the 2007 period. For our wholesale segment, net sales were $80.4 million for the first quarter of 2008, a decrease of $8.8 million from the 2007 period. This decline in sales volume primarily occurred in the tabletop and home décor categories. We believe the most significant factor contributing to the segment’s overall decline was the extremely challenging retail sales environment. In the direct-to-consumer segment, net sales were $17.8 million for the 2008 quarter, an increase of 21.9% from the 2007 period. This increase was driven primarily by our going out of business program for the previously announced closing of 30 underperforming stores. Catalog and internet sales increased due to the successful spring catalog and the late holiday orders in 2007 that were shipped in January 2008. Comparable store sales also showed an improvement. On a consolidated business, cost of sales for the first quarter of 2008 was 60.7% of sales compared to 58.9% in 2007. Our wholesale segment cost of sales was 63.2% of sales in 2008 quarter compared to 62.2% in 2007. This increase was due to our continued effort to reduce inventory levels and higher sales allowances. In the direct-to-consumer sales, cost of sales was 49.3% in 2008 compared to 38.7% in 2007. The increase as a percent of sales primarily resulted from lower margins from the going out of business program and to a lesser extent promotional activity in our ongoing stores. Distribution expenses were $13.4 million or 13.7% of sales in the 2008 quarter compared to $13.3 million or 12.8% of sales in 2007. In the wholesale segment, distribution expenses increased to 12.7% in 2008 versus 11.1% in 2007. As Jeff noted, the increased percentage primarily resulted from the integration expenses of consolidating into our new west coast distribution center. Excluding the integration expenses, distribution would have been a 10.9% of net sales. For the direct-to-consumer segment, distribution was 17.4% of sales in the 2008 quarter compared to 23.3% in 2007. The decreased percentage was primarily due to reduced third-party warehouse costs as a result of planned decreases in inventory levels and improved labor efficiency. Selling, general, and administrative expenses for the 2008 quarter were $31.1 million, an increase of 4% over 2007. Excluding unallocated corporate expenses, SG&A was $28.5 million in 2008 and $27.9 million 2007. Increases attributable to the amortization of our SAP enterprise system and lease hold improvements for our new headquarters was partially offset by the elimination of [inaudible] expenses of our former headquarters and expense reduction efforts in the direct-to-consumer segment. In addition, SG&A reflects the expense of trade credit risk protection we obtained to offset our risk associated with Linens N Things. Unallocated corporate expenses for the 2008 and 2007 quarters was $2.6 million and $2 million respectively. This increase is primarily due to higher professional fees and stock option expense. During the first quarter of 2008, we recorded a charge of $2.9 million for restructuring expenses relate to the planned closing of 30 underperforming stores. These charges were primarily for the lease obligations related to the closed stores. Loss from operations for the 2008 quarter was $8.8 million compared to $552,000 in 2007. In our wholesale segment, income from operations was $345,000 in 2008 and $5.6 million in 2007. In the direct-to-consumer segment, loss from operations was $6.5 million for the 2008 quarter and $3.6 million excluding restructuring expenses versus $4.1 million in 2007. Interest expense for the 2008 quarter was $2.1 million versus $1.5 million in 2007. The increase was attributable to higher borrowings under the bank credit agreement which was partially offset by lower interest rates. Our income tax rate was 42.5% for the 2008 quarter versus 38.5% for the 2007 quarter. The increase is principally due to stock option expense as it is not deductible for income tax purposes. Now turning to the balance sheet, our inventory reduction effort continues to show progress. Quarter-end inventory was $136.9 million which is $6.8 million lower than at year end and $17.6 million lower than at March of ’07. At March 31, 2008, our bank borrowings were $73.9 million, an increase of $5.2 million from year-end 2007. This compares to an increase in borrowing of $21.3 million in the 2007 period. While 2007 was burdened by $4.8 million in higher capital expenditures and acquisitions, this improvement especially reflects our management of inventory levels. We currently expect capital spending for 2008 to be approximately $8.5 million. We recently amended our credit agreement to provide for additional seasonal borrowing capacity. At April 30 of 2008, availability under our bank credit facility was approximately $35 million. Now I’ll turn the call over to Chris.

[Christian G. Kasper:]

Thanks, Larry. My remarks this quarter will highlight our progress in four areas

[Operator:]

(Operator Instructions) Your first question comes from Alvin Concepcion – Citigroup Global Markets.

[Alvin Concepcion:]

I just wanted to talk about the guidance for the year a little bit. It was --

[Christian G. Kasper:]

Alvin, excuse me. Would you please speak up, we’re having difficulty hearing you.

[Alvin Concepcion:]

Sure, I just wanted to talk about the guidance a little bit. It was 105 to 125, that’s excluding the DTC restructuring. Does that also exclude the consolidation of the west coast distribution facilities? The $0.07 that you got impacted by?

[Christian G. Kasper:]

No, it does not.

[Alvin Concepcion:]

Just to make sure, there’s about $0.05 left of restructuring in the DTC?

[Christian G. Kasper:]

We had estimated the DTC restructuring expense in total for the year 2008 to be $5 million. Year to date that number is substantially less than that but there are remaining expenses that will be incurred associated with the closing of the stores as previously announced so at this point we are still anticipating $5 million in total restructuring charges.

[Alvin Concepcion:]

Could you comment on your inventory levels at retail, your level of comfort with them?

[Jeffrey Siegel:]

The inventory levels at retail are low. They’re much lower than they were at the same point last year.

[Alvin Concepcion:]

And then going into the Vasconia product, how large do you think that opportunity is?

[Jeffrey Siegel:]

We’ve never given out the number and we still are reluctant to do so. We are getting terrific placement. We have national chains on board. It’s going to be a very important brand for Lifetime but I don’t want to go into any numbers at this point.

[Operator:]

Your next question comes from Bill Chappell - Suntrust Robinson Humphrey.

[Bill Chappell:]

First a basic question. It said I think in the press release you’re expecting 4,000 new products this year. I think if I remember, the button from the houseware show was like 2500, 2600 new products. Have you stepped up that since the houseware show even further or is it just a different number?

[Jeffrey Siegel:]

The largest number of new products are introduced in the first quarter of the year, that’s when we get placement for the year. I would say the number this year would be more than 4000 but we haven’t put out a new number.

[Christian G. Kasper:]

But Bill, to your point, I think it’s important to note that we’ve accelerated the development of new products and the timing of new product introductions earlier in the year to get more bang for the buck so to speak out of sales of products later in the year, so I do think that that’s an important point to note.

[Bill Chappell:]

And then in terms of the dinnerware business, can you talk to us a little bit more about profitability this year, can we get back to profitability? You shrink the losses from last year and maybe talk a little bit more about what gives you confidence there?

[Jeffrey Siegel:]

It’s difficult to give a real number. I can tell you there’s going to be a dramatic turnaround, truly dramatic turnaround. Starting in this quarter, top line sales in this quarter look like they’re going to be terrific. We have tremendous placement in customers that we had even no placement or negligible placement last year. We’re making great progress and in addition to that, we’re already starting the process towards 2009 and opening a lot of doors for 2009 as well so I don’t want to put a number on it but there will be a dramatic turnaround in that division. We’re very happy with the way the business is going.

[Bill Chappell:]

And help me to understand that. Is that just management focus, is it design, is it better retail relationships? Why such a change?

[Jeffrey Siegel:]

More than anything else, it’s management who really understands the design of products that are necessary to do business today. Dinnerware is driven more by the style of the product than by anything else. Brands are very important but the style of product is everything. A consumer is not going to buy a pattern of dinnerware if she doesn’t like it, no matter what the brand is. The current management that’s in place, Glen Simon and his team, have experience. They were extremely successful in the past with dinnerware and they’re just doing a phenomenal job today.

[Bill Chappell:]

And then just finally on China manufacturing, is there any way to quantify your cost increases as you’re looking at it with the VAT tax and other things going on there?

[Jeffrey Siegel:]

There have been many increases, probably starting about 18 months ago, between raw materials, between VAT tax changes, between exchange rate changes, between social issues that drive up costs and different labor laws. There have been continual increases, but remember this is an industry-wide thing that certainly doesn’t affect us more than anyone else. If anything, it affects us less, and the reason it affects us less is that we have more than 100 in-house designers that can redesign product and change product, reconfigure products, change materials... We have capabilities that our competitors don’t have so for us, it’s not a negative as you can see. We’ve pretty much been able to maintain our margins through most of it already, in almost every part of the business that we’re in. We don’t expect things to change. We expect it, of course, to continue to go up, but at a much slower rate. We think we’ve seen peaks in most of the materials. As demand slacks off with some of the materials, even with the increase in price of oil, there’s been a pull back in the price of plastics in the last two months. So we don’t see it as being a serious issue going forward. There are certainly increases out there and retailers are open to accepting the increases. Their main goal is to remain margin-neutral which is the same goal that we have, yet you can’t test price or push prices too high for consumers so we have to reconfigure a lot of things and change things, but somehow we’ve been able to manage it very well at this point.

[Operator:]

Gentlemen, there are no further questions at this time.

[Jeffrey Siegel:]

Thank you. Thanks again for joining us this morning. As I noted, we are very focused on innovation and exciting products and that is a key driver of our profitable growth. We’re working more closely than ever with our retail partners to give them what they want and what they need to ignite the interest of consumers. We’ll give you an update on all the activities in our second quarter call. Thank you.

[Operator:]

Ladies and gentlemen, that concludes your conference call for today. We thank you for your participation and ask that you please disconnect your lines at this time.