· | on July 2, 2012, we acquired an 80% interest in Brian Atwood-related intellectual property from BA Holding Group, Inc., BKA International, Inc. and Brian Atwood, we acquired 100% of the equity interests in Atwood Italia S.r.l., and we acquired certain assets and assumed certain liabilities of Brian Atwood, Ltd. |
Retail Store Closings
We continue to review our domestic retail operations for underperforming locations. As a result of these reviews, we have decided to close retail locations that no longer provide strategic benefits. During the first six months of 2012 and 2011, we closed 70 and 61 locations, respectively, and we anticipate closing additional locations in 2012. We accrued $1.9 million and $0.5 million of termination benefits and associated employee costs during the first fiscal six months of 2012 and 2011, respectively. In connection with our decision to close these stores, we reviewed the associated long-term assets for impairments. As a result of these reviews, we recorded $0.4 million and $2.5 million of impairment losses in the first fiscal six months of 2012 and 2011, respectively, on leasehold improvements and furniture and fixtures located in the stores to be closed. These costs are reported as selling, general and administrative ("SG&A") expenses in the domestic retail segment.
Critical Accounting Policies
Several of our accounting policies involve significant or complex judgements and uncertainties and require us to make certain critical accounting estimates. We consider an accounting estimate to be critical if it requires us to make assumptions about matters that were highly uncertain at the time the estimate was made. The estimates with the greatest potential effect on our results of operations and financial position include the collectibility of accounts receivable, the recovery value of obsolete or overstocked inventory and the fair values of goodwill, intangible assets and acquisition consideration liabilities. Estimates related to accounts receivable and inventory affect all of our reportable segments. Estimates related to goodwill affect our domestic wholesale sportswear, domestic wholesale footwear and accessories, international wholesale and international retail segments. Estimates related to intangible assets affect all of our segments. Estimates related to our acquisition consideration liabilities affect our domestic wholesale sportswear segment and our interest expense.
For accounts receivable, we estimate the net collectibility, considering both historical and anticipated trends of trade discounts and co-op advertising deductions given to our customers, allowances we
provide to our retail customers to flow goods through the retail channels, and the possibility of non-collection due to the financial position of our customers. For inventory, we estimate the amount of goods that we will not be able to sell in the normal course of business and write down the value of these goods to the recovery value expected to be realized. Historically, actual results in these areas have not been materially different than our estimates, and we do not anticipate that our estimates and assumptions are likely to materially change in the future. However, if we incorrectly anticipate trends or unexpected events occur, our results of operations could be materially affected.
We test our goodwill and our indefinite-lived trademarks for impairment on an annual basis (during our fourth fiscal quarter) and between annual tests if an event occurs or circumstances change that could reduce the fair value of an asset below its carrying value. These tests utilize discounted cash flow models to estimate fair values. These cash flow models involve several assumptions. Changes in our assumptions could materially impact our fair value estimates, and material impairment losses could result where the estimated fair values of these assets become less than their carrying amounts. Assumptions critical to our fair value estimates are: (i) discount rates used to derive the present value factors used in determining the fair value of the reporting units and trademarks; (ii) royalty rates used in our trademark valuations; (iii) projected average revenue growth rates used in the reporting unit and trademark models; and (iv) projected long-term growth rates used in the derivation of terminal values. These and other assumptions are impacted by economic conditions and expectations of management and will change in the future based on period-specific facts and circumstances.
Acquisition consideration liabilities are recorded as a result of acquisitions, where a portion of the purchase price is payable at the end of a specific future period, with the amount of payment based on the financial results of the acquired business during that period. Assumptions critical to our fair value estimates are: (i) discount rates used to derive the present value factors used in determining the fair value of the liabilities; (ii) gross margin or earnings before interest, taxes, depreciation and amortization ("EBITDA") multipliers as specified in the associated acquisition agreements; and (iii) estimated ranges of sales or EBITDA growth. Changes in our assumptions could materially impact our fair value estimates, and material gains and losses could result where the estimated fair value of these liabilities differ from their carrying amounts.
Results of Operations
Statements of Operations Stated in Dollars and as a Percentage of Total Revenues
(In millions) | | Fiscal Quarter Ended | | | Fiscal Six Months Ended | |
| | June 30, 2012 | | | July 2, 2011 | | | June 30, 2012 | | | July 2, 2011 | |
Net sales | | $ | 844.3 | | | | 98.8 | % | | $ | 876.7 | | | | 98.8 | % | | $ | 1,767.7 | | | | 98.7 | % | | $ | 1,825.7 | | | | 98.8 | % |
Licensing income | | | 10.2 | | | | 1.2 | | | | 10.4 | | | | 1.2 | | | | 22.5 | | | | 1.3 | | | | 22.5 | | | | 1.2 | |
Other revenues | | | 0.3 | | | | 0.0 | | | | 0.3 | | | | 0.0 | | | | 0.5 | | | | 0.0 | | | | 0.5 | | | | 0.0 | |
Total revenues | | | 854.8 | | | | 100.0 | | | | 887.4 | | | | 100.0 | | | | 1,790.7 | | | | 100.0 | | | | 1,848.7 | | | | 100.0 | |
Cost of goods sold | | | 528.6 | | | | 61.8 | | | | 564.3 | | | | 63.6 | | | | 1,121.1 | | | | 62.6 | | | | 1,194.9 | | | | 64.6 | |
Gross profit | | | 326.2 | | | | 38.2 | | | | 323.1 | | | | 36.4 | | | | 669.6 | | | | 37.4 | | | | 653.8 | | | | 35.4 | |
Selling, general and administrative expenses | | | 304.5 | | | | 35.6 | | | | 278.2 | | | | 31.4 | | | | 607.7 | | | | 33.9 | | | | 547.7 | | | | 29.6 | |
Operating income | | | 21.7 | | | | 2.5 | | | | 44.9 | | | | 5.1 | | | | 61.9 | | | | 3.5 | | | | 106.1 | | | | 5.7 | |
Net interest expense and financing costs | | | 8.8 | | | | 1.0 | | | | 37.0 | | | | 4.2 | | | | 51.5 | | | | 2.9 | | | | 58.2 | | | | 3.1 | |
Equity in income of unconsolidated affiliate | | | 0.4 | | | | 0.0 | | | | 0.7 | | | | 0.1 | | | | 1.3 | | | | 0.1 | | | | 2.0 | | | | 0.1 | |
Income before provision for income taxes | | | 13.3 | | | | 1.6 | | | | 8.6 | | | | 1.0 | | | | 11.7 | | | | 0.7 | | | | 49.9 | | | | 2.7 | |
Provision for income taxes | | | 4.9 | | | | 0.6 | | | | 3.2 | | | | 0.4 | | | | 4.3 | | | | 0.2 | | | | 18.7 | | | | 1.0 | |
Net income | | | 8.4 | | | | 1.0 | | | | 5.4 | | | | 0.6 | | | | 7.4 | | | | 0.4 | | | | 31.2 | | | | 1.7 | |
Less: income attributable to noncontrolling interest | | | 0.3 | | | | 0.0 | | | | 0.2 | | | | 0.0 | | | | 0.5 | | | | 0.0 | | | | 0.4 | | | | 0.0 | |
Income attributable to Jones | | $ | 8.1 | | | | 0.9 | % | | $ | 5.2 | | | | 0.6 | % | | $ | 6.9 | | | | 0.4 | % | | $ | 30.8 | | | | 1.7 | % |
Percentage totals may not add due to rounding.
Fiscal Quarter Ended June 30, 2012 Compared with Fiscal Quarter Ended July 2, 2011
Revenues. Total revenues for the second fiscal quarter of 2012 were $854.8 million, compared with $887.4 million for the second fiscal quarter of 2011, a decrease of 3.7%. Revenues by segment were as follows:
(In millions) | | Second Fiscal Quarter of 2012 | | | Second Fiscal Quarter of 2011 | | | Increase (Decrease | ) | | Percent Change | |
Domestic wholesale sportswear | | $ | 174.8 | | | $ | 203.0 | | | $ | (28.2 | ) | | | (13.9 | %) |
Domestic wholesale jeanswear | | | 151.0 | | | | 189.1 | | | | (38.1 | ) | | | (20.1 | ) |
Domestic wholesale footwear and accessories | | | 195.5 | | | | 188.4 | | | | 7.1 | | | | 3.8 | |
Domestic retail | | | 150.6 | | | | 166.5 | | | | (15.9 | ) | | | (9.5 | ) |
International wholesale | | | 75.4 | | | | 76.6 | | | | (1.2 | ) | | | (1.6 | ) |
International retail | | | 97.3 | | | | 53.4 | | | | 43.9 | | | | 82.2 | |
Licensing and other | | | 10.2 | | | | 10.4 | | | | (0.2 | ) | | | (1.9 | ) |
Total revenues | | $ | 854.8 | | | $ | 887.4 | | | $ | (32.6 | ) | | | (3.7 | %) |
Domestic wholesale sportswear revenues decreased $28.2 million, primarily due to decreased revenues in our Jones New York- and Anne Klein-related sportswear product lines (resulting from reduced shipments to lower-performing retail doors), our Joneswear product lines (resulting from a change in retail strategy at J.C. Penney Company, Inc. ("Penney's")) and our Le Suit and Kasper suit product lines (resulting from poor product performance at the retail level). These decreases were partially offset by increased revenues in our Kasper suit separates and sportswear lines, as well as in our Rachel Roy product line (resulting from positive product performance at the retail level).
Domestic wholesale jeanswear revenues decreased $38.1 million, primarily due to reduced shipments of our l.e.i. product line (resulting from a change in retail strategy at Wal-Mart Stores Inc. ("Walmart") which resulted in lower shipments of jeanswear replenishment product), our Gloria Vanderbilt and Erika product lines (resulting from the change in Penney's retail strategy), our Grane jeanswear line (resulting from poor product performance at the retail level) and our Energie product line (resulting from the challenging retail climate in the moderate junior tops business as well as product assortment issues). These decreases were partially offset by increased shipments of our Jessica Simpson product lines (resulting from positive product performance at the retail level and new product extensions).
Domestic wholesale footwear and accessories revenues increased $7.1 million, primarily due to increased shipments of our handbag and jewelry product lines (resulting from positive performance at the retail level for our AK Anne Klein handbags and jewelry, Nine West handbags and jewelry, and Jones New York and Givenchy jewelry), the initial launch of our B Brian Atwood footwear product line, increased shipments of our Easy Spirit, Enzo Angiolini, and Circa Joan & David footwear product lines (resulting from positive performance at the retail level), and increased shipments of our Bandolino and Jones New York footwear lines to off-price and club retailers. These increases were partially offset by reduced shipments of our Mootsies Tootsies product line (resulting from the decision of a wholesale customer to exit the brand), our Nine West and Stuart Weitzman footwear product lines (attributable to the timing of shipments), and our Boutique 9 footwear product lines (resulting from poor performance at the retail level), and by the conversion of our children's footwear product lines to a licensed business.
Domestic retail revenues decreased $15.9 million. Revenue decreases were primarily the result of a 4.5% decrease in comparable store sales ($6.7 million) resulting from poor product performance, primarily in the ready-to-wear stores, and a net $9.2 million reduction in revenues primarily related to our program to close underperforming locations. We began the current quarter with 633 retail locations and had a net decrease of 26 locations to end the quarter with 607 locations, compared with 703 locations at the end of the prior period. Our comparable apparel store sales decreased 10.1% ($3.9 million), our comparable e-commerce business sales decreased 10.6% ($1.8 million), and our comparable footwear store sales decreased 1.1% ($1.0 million). Comparable stores are locations (including e-commerce sites)
that have been open for a full year and are not scheduled to close, be expanded or downsized by more than 25% or relocated to a different street or mall in the current period.
International wholesale revenues decreased $1.2 million, primarily due to a $1.5 million decrease in our Nine West international business (attributable to the timing of product shipments to our licensed distributor in Asia and the effect of sales to Kurt Geiger in the prior period (as these revenues are now recorded as intercompany sales, partially offset by increased sales to our licensed distributor in the Middle East), a $0.5 million decrease in our Canadian business (resulting from reduced sales of our Anne Klein products and from the timing of shipments), a $0.8 million decrease in our Stuart Weitzman European business (resulting from decreased shipments to Western European stores, partially offset by increased shipments to franchisee stores), and a $0.8 million reduction in our Jones New York shipments to Mexico (resulting from poor performance at the retail level). These decreases were partially offset by $2.4 million of sales in the current period resulting from the acquisition of Kurt Geiger.
International retail revenues increased $43.9 million, primarily due to $43.8 million of sales resulting from the acquisition of Kurt Geiger and a $0.7 million increase in sales in our Canadian and Stuart Weitzman European retail locations (resulting from higher average realized selling prices). These increases were partially offset by a $0.6 million reduction in sales of our Jones New York products in our Spanish retail locations. We began the current quarter with 320 international stores and had a net increase of two locations to end the quarter with 322 stores, compared with 294 locations at the end of the prior period.
Licensing and other revenues decreased $0.2 million, primarily due to overall decreased sales volume of our licensees.
Gross Profit. The gross profit margins were 38.2% and 36.4% for the second fiscal quarters of 2012 and 2011, respectively.
Domestic wholesale sportswear gross profit margins were 34.6% and 34.8% for the second fiscal quarters of 2012 and 2011, respectively. The decrease was due to slightly higher levels of markdown assistance granted to our customers and the mix of products sold.
Domestic wholesale jeanswear gross profit margins were 24.2% and 22.8% for the second fiscal quarters of 2012 and 2011, respectively. The increase was primarily due to the mix of products sold.
Domestic wholesale footwear and accessories gross profit margins were 29.3% and 30.5% for the second fiscal quarters of 2012 and 2011, respectively. The decrease was primarily due to higher levels of markdown assistance in all of the footwear and accessories product lines and higher product costs, which were partially offset by price increases, and an increase due to the mix of products sold.
Domestic retail gross profit margins were 55.3% and 53.9% for the second fiscal quarters of 2012 and 2011, respectively. The increase was primarily due to the mix of products sold as well as lower levels of promotional activity and lower freight costs.
International wholesale gross profit margins were 31.4% and 29.4% for the second fiscal quarters of 2012 and 2011, respectively. The increase was primarily due the mix of products sold resulting from the acquisition of Kurt Geiger and the mix of product sold to our international distributors of Nine West products in the current period.
International retail gross profit margins were 55.8% and 54.5% for the second fiscal quarters of 2012 and 2011, respectively. The increase was primarily due to the mix of products sold as a result of the acquisition of Kurt Geiger, partially offset by higher product costs for our Canadian retail business.
Selling, General and Administrative Expenses. SG&A expenses were $304.5 million and $278.2 million in the second fiscal quarters of 2012 and 2011, respectively. The acquisition of Kurt Geiger added a net $21.3 million in SG&A expenses to the second fiscal quarter of 2012.
Domestic wholesale sportswear SG&A expenses increased $3.3 million, primarily due to a $1.0 million reduction in the acquisition consideration payable related to the acquisition of Moda Nicola International, LLC ("Moda") compared with a $6.3 million reduction in the prior period, a $0.6 million gain on the British Pound in the prior period, a $0.3 million increase in severance expense and a $0.3 million increase in depreciation and amortization expense. These increases were partially offset by a $1.6 million decrease in compensation expense resulting from reduced headcount, a $0.9 million planned reduction in advertising and marketing expenses and a decrease of $0.7 million in samples expense.
Domestic wholesale jeanswear SG&A expenses decreased $1.6 million, primarily due to a $2.5 million decrease in distribution expense resulting from a decrease in the number of units sold and a $0.6 million reduction in compensation expense resulting from reduced headcount. These decreases were partially offset by a $0.9 million increase in lease termination costs relating to one of our unused warehouses, resulting from a subtenant's early termination of the lease, a $0.4 million increase in advertising expenses and a $0.2 million increase in our royalties payable under the Jessica Simpson license.
Domestic wholesale footwear and accessories SG&A expenses decreased $0.9 million, primarily due to a $3.7 million decrease in losses recorded related to future costs of leases on buildings we do not currently use, a $0.7 million decrease in compensation expenses, a $0.5 million decrease in depreciation expense resulting from assets becoming fully depreciated, and $0.1 million of other net decreases. These decreases were partially offset by a $1.6 million increase in advertising expenses, a $1.6 million increase in severance expense, $0.5 million in showroom and rent expenses for new space added for Stuart Weitzman products and $0.4 million attributable to the timing of samples expenses.
Domestic retail SG&A expenses increased $1.4 million, primarily due to a $3.4 million increase in administrative expenses and costs for services provided by other supporting business units, a $1.9 million write-off of settled merchandise credits in the prior period, $1.2 million of operating and rent expenses for new Stuart Weitzman locations, a $1.1 million increase in severance expense and $0.4 million of other net increases. These increases were partially offset by a $3.1 million reduction in occupancy and depreciation expenses, a $1.4 million reduction in salaries and benefits and a $0.6 million reduction in credit and debit card fees (primarily resulting from a reduction in interchange fees charged by our banks), a $0.8 million reduction in advertising expenses and a $0.7 million decrease in store-related impairment losses compared with the prior period.
International wholesale SG&A expenses increased $1.0 million, primarily due to a $1.0 million increase in foreign currency expense resulting from the unfavorable exchange rates between the Euro and U.S. Dollar, a $0.8 million increase in advertising expenses for our Stuart Weitzman brand, $0.6 million in higher compensation costs and $0.5 million of expenses resulting from the acquisition of Kurt Geiger. These increases were partially offset by a $1.1 million decrease in costs for services provided by other supporting business units, a net $0.6 million decrease in our Nine West international business (primarily due to $0.2 million in severance expense in the prior period and lower administrative expenses of $0.3 million and lower advertising expenses of $0.1 million in the current period) and $0.2 million of other net decreases.
International retail SG&A expenses increased $25.0 million, primarily due to a $24.8 million increase resulting from the acquisition of Kurt Geiger, a $0.7 million increase in costs for services provided by other supporting business units and $0.3 million in other net increases. These increases are partially offset by a $0.8 million decrease in costs from our Spanish retail business due to lower concession fees and warehousing costs.
SG&A expenses for the licensing, other and eliminations segment decreased $1.9 million, primarily due to $4.7 million in acquisition-related expenses for Kurt Geiger recorded in the prior period. This decrease was partially offset by a $1.8 million increase in compensation expense, primarily related to higher amortization of stock-based compensation, a $0.6 million net effect of unfavorable exchange rate differences between the U.S. Dollar and the British Pound and Canadian Dollar, a $0.3 million reduction in advertising contribution payments from our licensees and $0.1 million in other net increases.
Operating Income. The resulting operating income for the second fiscal quarter of 2012 was $21.7 million, compared with $44.9 million for the second fiscal quarter of 2011, due to the factors described above.
Net Interest Expense. Net interest expense decreased $28.2 million, resulting from a $27.2 million change in interest relating to the Stuart Weitzman Holdings, LLC ("SWH") acquisition consideration liability (primarily resulting from changes in the estimated payments to be made under the acquisition agreement) and a $2.0 million decrease in expenses related to our secured revolving credit agreement, partially offset by a net $0.7 million increase in interest expense from the effects of our interest rate swaps and cap and $0.3 million of other net increases.
Income Taxes. The effective income tax rate was 37.0% and 37.5% for the second fiscal quarters of 2012 and 2011, respectively. The decrease is primarily due to the impact of a foreign tax benefit on lower pre-tax income in the second fiscal quarter of 2012 compared with the second fiscal quarter of 2011.
Net Income and Earnings Per Share. Net income was $8.4 million in the second fiscal quarter of 2012, compared with net income of $5.4 million in the second fiscal quarter of 2011. Diluted earnings per share for the second fiscal quarter of 2012 was $0.10, compared with diluted earnings per share of $0.06 for the second fiscal quarter of 2011, with 8.7% fewer diluted shares outstanding.
Fiscal Six Months Ended June 30, 2012 Compared with Fiscal Six Months Ended July 2, 2011
Revenues. Total revenues for the first fiscal six months of 2012 were $1.79 billion, compared with $1.85 billion for the first fiscal six months of 2011, a decrease of 3.1%. Revenues by segment were as follows:
(In millions) | | First Fiscal Six Months of 2012 | | | First Fiscal Six Months of 2011 | | | Increase (Decrease | ) | | Percent Change | |
Domestic wholesale sportswear | | $ | 408.4 | | | $ | 471.7 | | | $ | (63.3 | ) | | | (13.4 | %) |
Domestic wholesale jeanswear | | | 335.8 | | | | 424.6 | | | | (88.8 | ) | | | (20.9 | ) |
Domestic wholesale footwear and accessories | | | 421.3 | | | | 409.0 | | | | 12.3 | | | | 3.0 | |
Domestic retail | | | 278.7 | | | | 301.7 | | | | (23.0 | ) | | | (7.6 | ) |
International wholesale | | | 148.8 | | | | 155.7 | | | | (6.9 | ) | | | (4.4 | ) |
International retail | | | 175.2 | | | | 63.6 | | | | 111.6 | | | | 175.5 | |
Licensing and other | | | 22.5 | | | | 22.4 | | | | 0.1 | | | | 0.4 | |
Total revenues | | $ | 1,790.7 | | | $ | 1,848.7 | | | $ | (58.0 | ) | | | (3.1 | %) |
Domestic wholesale sportswear revenues decreased $63.3 million, primarily due to decreased revenues in our Jones New York- and Anne Klein-related sportswear product lines (resulting from reduced shipments to lower-performing retail doors), our Joneswear product lines (resulting from a change in retail strategy at Penney's) and our Le Suit and Kasper suit product lines (resulting from poor product performance at the retail level). These decreases were partially offset by increased revenues in our Kasper suit separates and sportswear lines and our Rachel Roy product line (resulting from positive product performance at the retail level) and initial shipments of our AK Anne Klein dress line.
Domestic wholesale jeanswear revenues decreased $88.8 million, primarily due to reduced shipments of our l.e.i. product line (resulting from a change in retail strategy at Walmart which resulted in lower shipments of jeanswear replenishment product), our Gloria Vanderbilt and Erika product lines (resulting from the change in Penney's retail strategy), our Bandolino product line (resulting from a change in retail strategy of a major customer), our Grane product line (resulting from poor product performance at the retail level) and our Energie product line (resulting from the challenging retail climate in the moderate junior tops business as well as product assortment issues). These decreases were partially offset by increased shipments of our Jessica Simpson product lines (resulting from positive product performance at the retail level and new product extensions).
Domestic wholesale footwear and accessories revenues increased $12.3 million, primarily due to increased shipments of our handbag and jewelry product lines (resulting from positive performance at the retail level for our AK Anne Klein handbags and jewelry, Napier jewelry and Nine West handbags and jewelry), the initial launch of our B Brian Atwood footwear product line and increased shipments of our Easy Spirit, Enzo Angiolini, Circa Joan & David, AK Anne Klein, Rachel Roy and Sam & Libby footwear product lines (resulting from positive performance at the retail level). These increases were partially offset by reduced shipments of our Mootsies Tootsies product line (resulting from the decision of a wholesale customer to exit the brand), our Nine West footwear product lines (resulting from a decision to reduce the brand's penetration in off-price retail locations) and our Boutique 9 footwear product lines (resulting from poor performance at the retail level) and by the conversion of our children's footwear product lines to a licensed business.
Domestic retail revenues decreased $23.0 million. Revenue decreases were primarily the result of a 2.0% decrease in comparable store sales ($5.4 million), resulting from reduced e-commerce sales and poor product performance in our ready-to-wear stores, and a net $17.6 million reduction in revenues primarily related to our program to close underperforming locations. We began the current period with 672 retail locations and had a net decrease of 65 locations to end the period with 607 locations, compared with 703 locations at the end of the prior period. Our comparable footwear store sales increased 1.7% ($2.8 million), our comparable e-commerce business sales decreased 12.2% ($4.3 million) and our comparable apparel store sales decreased 6.0% ($3.9 million).
International wholesale revenues decreased $6.9 million, primarily due to a $5.5 million decrease in our Nine West international business (attributable to the timing of product shipments due to factory delays and production schedules and the effect of the sales to Kurt Geiger in the prior period, as these revenues are now recorded as intercompany sales), a $3.7 million decrease in our Canadian business (resulting from reduced sales of our Anne Klein and Jones New York products), a $0.6 million effect of unfavorable exchange rate differences between the Canadian Dollar and the U.S. Dollar, a $3.6 million decrease in our Stuart Weitzman European business (primarily in Italy, Western Europe and the United Kingdom, partially offset by an increase in shipments to franchisee stores), and a $1.7 million reduction in our Jones New York shipments to Mexico (resulting from poor performance at the retail level). These decreases were partially offset by $7.6 million of sales resulting from the acquisition of Kurt Geiger and increased sales to our licensed distributor in the Middle East.
International retail revenues increased $111.6 million, primarily due to $107.4 million of sales resulting from the acquisition of Kurt Geiger, a $3.2 million increase in sales of our Jones New York products in our Spanish retail locations (which began operations in March 2011) and a $1.0 million increase in sales in our Canadian and Stuart Weitzman European retail locations (resulting from higher average realized selling prices). We began the current period with 315 stores and had a net increase of seven locations to end the period with 322 stores, compared with 294 locations at the end of the prior period.
Licensing and other revenues increased $0.1 million, primarily due to overall increased sales volume of our licensees.
Gross Profit. The gross profit margins were 37.4% and 35.4% for the first fiscal six months of 2012 and 2011, respectively.
Domestic wholesale sportswear gross profit margins were 34.8% and 34.5% for the first fiscal six months of 2012 and 2011, respectively. The increase was largely due to slightly higher realized selling prices, as well as lower levels of sales (with improved margins) to off-price retailers.
Domestic wholesale jeanswear gross profit margins were 25.3% and 24.6% for the first fiscal six months of 2012 and 2011, respectively. The increase was primarily due to the mix of products sold.
Domestic wholesale footwear and accessories gross profit margins were 30.4% and 30.8% for the first fiscal six months of 2012 and 2011, respectively. The decrease was primarily due to higher sales to off-
price retailers and the timing of markdown assistance in all of the footwear and accessories product lines, partially offset by an increase due to the mix of products sold.
Domestic retail gross profit margins were 53.0% and 51.4% for the first fiscal six months of 2012 and 2011, respectively. The increase was primarily due to the mix of products sold as well as lower levels of promotional activity and lower freight costs.
International wholesale gross profit margins were 32.5% and 31.0% for the first fiscal six months of 2012 and 2011, respectively. The increase was primarily due to the mix of products sold resulting from the acquisition of Kurt Geiger and changes in pricing strategies and higher average selling prices in our Canadian business.
International retail gross profit margins were 54.7% and 53.6% for the first fiscal six months of 2012 and 2011, respectively. The increase was primarily due to the mix of products sold as a result of the acquisition of Kurt Geiger and lower levels of promotional activity in our Canadian retail stores.
Selling, General and Administrative Expenses. SG&A expenses were $607.7 million and $547.7 million in the first fiscal six months of 2012 and 2011, respectively. The acquisition of Kurt Geiger added a net $57.2 million in SG&A expenses to the first fiscal six months of 2012.
Domestic wholesale sportswear SG&A expenses increased $0.3 million, primarily due to a $5.5 million increase in severance expense, a $4.1 million decrease in the acquisition consideration payable related to the acquisition of Moda compared with a $6.5 million decrease in the prior period, a $1.9 million increase in reimbursements for services provided to other supporting business units, a $0.6 million gain on the British Pound in the prior period and $0.1 million of other net increases. These increases were partially offset by a $5.3 million planned reduction in advertising and marketing expenses, a $3.2 million decrease in compensation expense resulting from reduced headcount and a decrease of $1.7 million in samples expense.
Domestic wholesale jeanswear SG&A expenses decreased $3.1 million, primarily due to a $5.3 million decrease in distribution expense resulting from a decrease in the number of units sold, a $1.7 million reduction in compensation expense resulting from reduced headcount and a $0.5 million reduction in severance expense. These decreases were partially offset by a $1.1 million increase in advertising expense, a $1.0 million increase in samples expense, a $0.9 million increase in lease termination costs relating to one of our unused warehouses, resulting from a subtenant's early termination of the lease, a $0.5 million favorable use tax settlement in the prior period, a $0.5 million increase in administrative expenses and $0.4 million of other net increases.
Domestic wholesale footwear and accessories SG&A expenses increased $0.7 million, primarily due to a $3.8 million increase in advertising expenses, a $1.9 million increase in severance expense, a $1.2 million increase in administrative costs and $0.9 million in showroom and rent expenses for new space added for Stuart Weitzman products. These increases were partially offset by a $3.7 million decrease in losses recorded related to future costs of leases on buildings we do not currently use, a $1.3 million decrease in compensation expenses resulting from reduced headcount, a $0.9 million decrease in depreciation expense resulting from the assets becoming fully depreciated, a $0.4 million reduction in professional fees, a $0.3 million reduction in distribution costs and $0.5 million of other net decreases.
Domestic retail SG&A expenses decreased $0.1 million, primarily due to a $5.0 million reduction in occupancy and depreciation expenses, a $3.0 million reduction in salaries and benefits and a $1.1 million reduction in credit and debit card fees (primarily resulting from a reduction in interchange fees charged by our banks), a $0.8 million reduction in advertising expenses and a $2.1 million decrease in store-related impairment losses compared with the prior period. These decreases were partially offset by a $4.7 million increase in costs for services provided by other supporting business units, a $3.2 million increase in operating and rent expenses for new Stuart Weitzman locations, a $1.9 million write-off of settled merchandise credits in the prior period, a $1.7 million increase in severance expense and $0.4 million of other net increases.
International wholesale SG&A expenses decreased $0.7 million, primarily due to a $3.5 million decrease in costs for services provided by other supporting business units and $1.8 million in lower severance expense. These decreases were partially offset by $1.8 million of expenses resulting from the acquisition of Kurt Geiger, a $1.5 million increase in foreign currency expense due to the unfavorable exchange rates between the Euro and U.S. Dollar, a $1.0 million increase in advertising expenses for our Stuart Weitzman brand and $0.3 million of other net increases.
International retail SG&A expenses increased $65.0 million, primarily due to a $61.7 million increase resulting from the acquisition of Kurt Geiger, $1.4 million related to our Spanish retail business (which began operations in March 2011), a net $1.6 million increase in expenses in our Canadian business (resulting from higher costs for services provided by other supporting business units and higher salary expenses), and $0.3 million of other net increases.
SG&A expenses for the licensing, other and eliminations segment decreased $2.1 million, primarily due to $4.7 million in acquisition-related expenses for Kurt Geiger in the prior period and a $2.8 million effect of favorable exchange rate differences between the U.S. Dollar and the British Pound and Canadian Dollar. These decreases were partially offset by a $4.0 million increase in compensation expense, primarily related to higher amortization of stock-based compensation, and a $1.4 million reduction in advertising contribution payments from our licensees in the current period.
Operating Income. The resulting operating income for the first fiscal six months of 2012 was $61.9 million, compared with $106.1 million for the first fiscal six months of 2011, due to the factors described above.
Net Interest Expense. Net interest expense decreased $6.7 million, resulting from an $8.3 million change in interest relating to the SWH acquisition consideration liability (primarily resulting from changes in the estimated payments to be made under the acquisition agreement), a $2.5 million decrease in expenses related to our secured revolving credit agreement and a net $0.1 million decrease in interest expense from the effects of our interest rate swaps and cap, partially offset by a $3.6 million increase resulting from the issuance of our 2019 Notes on March 7, 2011 and $0.6 million of other net increases.
Income Taxes. The effective income tax rate was 37.0% and 37.5% for the first fiscal six months of 2012 and 2011, respectively. The decrease is primarily due to the impact of a foreign tax benefit on lower pre-tax income in the first fiscal six months of 2012 compared with the first fiscal six months of 2011.
Net Income and Earnings Per Share. Net income was $7.4 million in the first fiscal six months of 2012, compared with net income of $31.2 million in the first fiscal six months of 2011. Diluted earnings per share for the first fiscal six months of 2012 was $0.09, compared with diluted earnings per share of $0.36 for the first fiscal six months of 2011, with 7.0% fewer diluted shares outstanding.
Liquidity and Capital Resources
Our principal capital requirements have been for working capital needs, capital expenditures, dividend payments, acquisition funding and repurchases of our common stock on the open market. We have historically relied on internally generated funds, trade credit, bank borrowings and the issuance of notes to finance our operations. We currently fund our operations primarily through cash generated by operating activities, and rely on our revolving credit facility for the issuance of trade letters of credit for the purchases of inventory and for cash borrowings as needed. As of June 30, 2012, total cash and cash equivalents were $238.8 million, an increase of $38.3 million from the $277.1 million reported as of December 31, 2011.
Cash flows from operating activities provided $124.0 million and $65.6 million in the first fiscal six months of 2012 and 2011, respectively. The change from the prior period was primarily due to changes in working capital and net income. Accounts receivable decreased in the current period compared with an increase in the prior period primarily due to lower levels of wholesale shipments in the current period. Inventories decreased in the current period compared with an increase in the prior period, primarily due
to lower levels of projected wholesale sales. We also paid $24.4 million of accrued Kurt Geiger interest subsequent to the acquisition in the prior period.
Cash flows from investing activities used $41.8 million and $192.6 million in the first fiscal six months of 2012 and 2011, respectively, primarily for the purchases of property and equipment in both periods and the acquisition of Kurt Geiger in 2011.
Cash flows from financing activities used $43.7 million in the first fiscal six months of 2012, primarily for repurchases of our common stock, the payment of dividends and payments related to acquisition consideration liabilities.
Cash flows from financing activities provided $73.8 million in the first fiscal six months of 2011, primarily as the result of the issuance of our 2019 Notes. Uses of cash during this period were primarily for repayment of acquired Kurt Geiger debt, debt issuance and financing costs, the repurchase of our common stock, the payment of dividends and payments related to the acquisition consideration liabilities.
In March 2011, we issued the 2019 Notes. Net proceeds were $293.3 million, of which $45.0 million was used to repay amounts then outstanding under our secured revolving credit agreement.
We repurchased approximately 3.0 million shares of our common stock for $29.0 million on the open market during the first fiscal six months 2012 and 2.2 million shares of our common stock for $28.0 million on the open market during the first fiscal six months 2011. As of June 30, 2012, $186.5 million of Board authorized repurchases was still available. We may make additional share repurchases in the future depending on, among other things, market conditions and our financial condition.
We have a secured revolving credit agreement expiring on April 28, 2016 (the "Credit Facility") with several lending institutions to borrow an aggregate principal amount of up to $650 million. The terms and conditions of our Credit Facility provide for, among other things: (1) a $350 million U.S. commitment which may be drawn by the U.S. borrowers as revolving loans in U.S. Dollars or letters of credit in Canadian Dollars, U.S. Dollars, or an "LC Alternative Currency" (namely Euros, sterling, or any other currency acceptable to the lenders); and (2) a $300 million international commitment which may be drawn by the U.S. borrowers or by any Canadian or European borrowers as revolving loans or letters of credit in Canadian Dollars, U.S. Dollars, or an LC Alternative Currency. Up to the entire amount of the Credit Facility is available for cash borrowings, with an overall sublimit of up to $350 million for all letters of credit. All of the overall $350 million sublimit may be used for trade letters of credit; and within that overall sublimit, there are additional sublimits, including (but not limited to) $50 million for standby letters of credit and $150 million for letters of credit under the U.S. commitment denominated in an LC Alternative Currency.
Borrowings under the Credit Facility may be used to refinance certain existing indebtedness, to make certain investments (including acquisitions), and for general corporate purposes in the ordinary course of business. Such borrowings bear interest either based on the alternate base rate, as defined in the Credit Facility, or based on Eurocurrency rates, each with a margin that depends on the availability remaining under the Credit Facility. The Credit Facility contains customary events of default.
Availability under the Credit Facility is determined with reference to a borrowing base consisting of a percentage of eligible inventory, accounts receivable, credit card receivables and licensee receivables, minus reserves determined by the joint collateral agents. At June 30, 2012, we had no cash borrowings and $16.3 million of letters of credit outstanding, and our remaining availability was $381.6 million. If availability under the Credit Facility falls below a stated level, we will be required to comply with a minimum fixed charge coverage ratio. The Credit Facility also contains affirmative and negative covenants that, among other things, will limit or restrict our ability to (1) incur indebtedness, (2) create liens, (3) merge, consolidate, liquidate or dissolve, (4) make investments (including acquisitions), loans or advances, (5) sell assets, (6) enter into sale and leaseback transactions, (7) enter into swap agreements, (8) make certain restricted payments (including dividends and other payments in respect of capital stock), (9) enter into transactions with affiliates, (10) enter into restrictive agreements, and (11) amend material
documents. The Credit Facility is secured by a first priority lien on substantially all of our personal property.
SWH has a $1.5 million unsecured borrowing facility with a lending institution that expires on October 1, 2012 and is renewable on an annual basis, under which no cash borrowings and $1.1 million in letters of credit were outstanding at June 30, 2012. Cash borrowings under this facility bear interest based on either the prevailing prime rate or the prevailing LIBOR rate plus 300 basis points. SWH also has a €0.3 million variable-rate unsecured borrowing facility with a European lending institution that expires in March 2013 and is renewable on an annual basis, under which no amounts were outstanding at June 30, 2012.
On July 25, 2012, we announced that our Board of Directors had declared a quarterly cash dividend of $0.05 per share to all common stockholders of record as of August 10, 2012 for payment on August 24, 2012.
Economic Outlook
The uncertain economic and political environments have resulted in fluctuating consumer confidence. Rising energy, gasoline and other prices are reducing consumers' discretionary income. This may lead to reduced consumer spending, which could affect our net sales and our future profitability. Our recent acquisitions have increased our presence within the European Union, where the current highly uncertain economic and political conditions may lead to reduced consumer spending in those countries as well.
Reduced consumer spending, combined with rising costs related to changes in foreign exchange rates, increasing labor costs (primarily in Asia), commodity prices and increasing transportation costs, may reduce our gross profit margins from present levels. We may be limited in our ability to compensate for a loss of revenues or increase our selling prices to offset rising costs. Should the consumer not accept higher retail prices for our products, these rising costs would have a material adverse effect on our business.
Our products are manufactured in many foreign countries, including China, Brazil, Spain and Italy. Due to the current and expected future economic relationship between the United States and China, we may experience increased risk related to changes in foreign currency exchange rates should China allow the Yuan to continue to rise in value against the Dollar. We may also experience increased risk related to changes in foreign currency rates between the Euro, British Pound and the Dollar due to economic conditions in Europe. Should either of these occur, increased production costs for our goods manufactured in China, Spain and Italy could result.
When adverse economic conditions exist in the United States or abroad, we may experience increased risk related to the collectibility of our accounts receivable, and we may increase our provision for doubtful accounts in the future should any of our wholesale customers experience significant financial difficulties. If such conditions lead to defaults that are individually or cumulatively significant, we could experience a material adverse impact on our financial condition, results of operations and/or liquidity.
The economic turmoil in the credit markets over the past several years and the negative effects of the economic environment on our business may negatively impact our ability to borrow funds in the future. However, we believe that available cash and cash equivalents, funds generated by operations and the Credit Facility will provide the financial resources sufficient to meet our foreseeable working capital, dividend, capital expenditure and stock repurchase requirements and fund our contractual obligations and our acquisition liabilities and commitments. Although there can be no assurances, we believe that the participating banks will be willing and able to loan funds to us in accordance with their legal obligations under the Credit Facility.
New Accounting Standards
There have been no new accounting standards issued by the FASB during 2012 through the date of this filing that would have an effect on our results of operation or financial position.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market Risk Sensitive Instruments
We are exposed to the impact of interest rate changes, foreign currency fluctuations, and changes in the market value of our fixed rate long-term debt. We manage this exposure through regular operating and financing activities and, when deemed appropriate, through the use of derivative financial instruments. Our policy allows the use of derivative financial instruments for identifiable market risk exposures, including interest rate and foreign currency fluctuations. We do not enter into derivative financial contracts for trading or other speculative purposes. The following quantitative disclosures were derived using quoted market prices, yields and theoretical pricing models obtained through independent pricing sources for the same or similar types of financial instruments, taking into consideration the underlying terms, such as the coupon rate, term to maturity and imbedded call options. Certain items such as lease contracts, insurance contracts, and obligations for pension and other post-retirement benefits were not included in the analysis. For further information see "Derivatives" and "Financial Instruments" in the Notes to Consolidated Financial Statements.
Interest Rates
Our primary interest rate exposures relate to the fair value of our fixed rate long-term debt and interest expense related to our revolving credit facility.
At June 30, 2012, the fair value of our fixed rate debt was $732.5 million. On that date, the potential decrease in fair value of our fixed rate long-term debt instruments resulting from a hypothetical 10% adverse change in interest rates was approximately $67.4 million.
Our primary interest rate exposures on variable rate credit facilities are with respect to United States and Canadian short-term rates. Cash borrowings under these facilities bear interest at rates that vary with changes in prevailing market rates. At June 30, 2012, we had $651.8 million in variable rate credit facilities, under which no cash borrowings and $17.4 million of letters of credit were outstanding.
At June 30, 2012, we had an outstanding an interest rate cap that was used in conjunction with the interest rate swaps on the 2014 Notes to limit our floating rate exposure. The cap limits our three-month LIBOR rate exposure to 5.0%. The cap has a termination date of November 15, 2014. At June 30, 2012, the cap had no fair value.
Foreign Currency Exchange Rates
We are exposed to market risk related to changes in foreign currency exchange rates. Our products are primarily purchased from foreign manufacturers in pre-set United States Dollar prices, although we also purchase certain products in Euros and Pounds. We also have assets, liabilities and intercompany accounts denominated in certain foreign currencies that generate exchange gains and losses as exchange rates change. To date, we generally have not been materially adversely affected by fluctuations in exchange rates.
At June 30, 2012, we had outstanding foreign exchange contracts to exchange Canadian Dollars for a total notional value of US$10.2 million at a weighted-average exchange rate of 1.00 maturing through November 2012 and to exchange £3 million for U.S. Dollars at an exchange rate of 1.61 maturing in December 2012. The fair value of these contracts at June 30, 2012 was a $0.2 million unrealized gain. We believe that these financial instruments should not subject us to undue risk due to foreign exchange movements because gains and losses on these contracts should offset losses and gains on the assets, liabilities, and transactions being hedged. We are exposed to credit-related losses if the counterparty to a financial instrument fails to perform its obligation. However, we do not expect the counterparty, which presently has a high credit rating, to fail to meet its obligations.
Item 4. Controls and Procedures
As required by Exchange Act Rule 13a-15(b), we carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based upon this evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that both our disclosure controls and procedures and our internal controls and procedures are designed to provide and are effective in providing reasonable assurance in timely alerting them to material information required to be included in our periodic SEC filings and ensuring that information required to be disclosed by us in these periodic filings is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and that our internal controls are effective in ensuring that our financial statements are fairly presented in conformity with generally accepted accounting principles.
We have made changes to our internal controls and procedures over financial reporting to address the implementation of SAP, an enterprise resource planning ("ERP") system. SAP will integrate our operational and financial systems and expand the functionality of our financial reporting processes. We began the process of implementing SAP throughout The Jones Group Inc. and our consolidated subsidiaries during the fourth quarter of 2006. During the second fiscal quarter of 2012, no additional businesses were converted to this system. We have adequately controlled the transition to the new processes and controls, with no negative impact to our internal control environment. We expect to continue the implementation of this system to all locations over a multi-year period. As the phased implementation occurs, we will experience changes in internal control over financial reporting. We expect this ERP system to further advance our control environment by automating manual processes, improving management visibility and standardizing processes as its full capabilities are utilized.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
We have been named as a defendant in various actions and proceedings arising from our ordinary business activities. Although the amount of any liability that could arise with respect to these actions cannot be accurately predicted, in our opinion, any such liability will not have a material adverse financial effect on us.
Item 2. Issuer Purchase of Equity Securities
The following table sets forth the repurchases of our common stock for the fiscal quarter ended June 30, 2012.
Issuer Purchases of Equity Securities
Period | | (a) Total Number of Shares (or Units) Purchased | | | (b) Average Price Paid per Share (or Unit) | | | (c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs | | | (d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs | |
April 2, 2012 to April 28, 2012 | | | 165,575 | | | $ | 11.42 | | | | 165,575 | | | $ | 204,564,236 | |
April 29, 2012 to May 26, 2012 | | | 1,779,405 | | | $ | 9.95 | | | | 1,779,405 | | | $ | 186,856,704 | |
May 26, 2012 to June 30, 2012 | | | 42,627 | | | $ | 9.38 | | | | 42,627 | | | $ | 186,456,711 | |
Total | | | 1,987,607 | | | $ | 10.06 | | | | 1,987,607 | | | $ | 186,456,711 | |
These purchases were made under a program announced on September 6, 2007 for $500.0 million. This program has no expiration date.
Item 5. Other Information
STATEMENT REGARDING FORWARD-LOOKING DISCLOSURE
This Report includes, and incorporates by reference, "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. All statements regarding our expected financial position, business and financing plans are forward-looking statements. The words "believes," "expects," "plans," "intends," "anticipates" and similar expressions identify forward-looking statements. Forward-looking statements also include representations of our expectations or beliefs concerning future events that involve risks and uncertainties, including:
· | those associated with the effect of national, regional and international economic conditions; |
· | lowered levels of consumer spending resulting from a general economic downturn or lower levels of consumer confidence; |
· | the tightening of the credit markets and our ability to obtain capital on satisfactory terms; |
· | given the uncertain economic environment, the possible unwillingness of committed lenders to meet their obligations to lend to borrowers, in general; |
· | the performance of our products within the prevailing retail environment; |
· | customer acceptance of both new designs and newly-introduced product lines; |
· | our reliance on a few department store groups for large portions of our business; |
· | our ability to identify acquisition candidates and, in a competitive environment for such acquisitions, acquire such businesses on reasonable financial and other terms; |
· | the integration of the organizations and operations of any acquired business into our existing organization and operations; |
· | consolidation of our retail customers; |
· | financial difficulties encountered by our customers; |
· | the effects of vigorous competition in the markets in which we operate; |
· | our ability to attract and retain qualified executives and other key personnel; |
· | our reliance on independent foreign manufacturers, including political instability in countries where contractors and suppliers are located; |
· | changes in the costs of raw materials, labor, advertising and transportation, including the impact such changes may have on the pricing of our products and the resulting impact on consumer acceptance of our products at higher price points; |
· | our ability to successfully implement new operational and financial information systems; and |
· | our ability to secure and protect trademarks and other intellectual property rights. |
All statements other than statements of historical facts included in this Report, including, without limitation, the statements under "Management's Discussion and Analysis of Financial Condition and Results of Operations," are forward-looking statements. Although we believe that the expectations reflected in such forward-looking statements are reasonable, such expectations may prove to be incorrect. Important factors that could cause actual results to differ materially from our expectations ("Cautionary Statements") are disclosed in this Report in conjunction with the forward-looking statements. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the Cautionary Statements. We do not undertake to publicly update or revise our forward-looking statements as a result of new information, future events or otherwise.
See Exhibit Index.
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
THE JONES GROUP INC.
(Registrant)
Date: July 27, 2012
By /s/ Wesley R. Card
WESLEY R. CARD
Chief Executive Officer
By /s/ John T. McClain
JOHN T. McCLAIN
Chief Financial Officer
10.1* | The Jones Group Inc. Severance Plan, as amended, and Summary Plan Description. |
31* | Certifications of Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
32♦ | Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
101.INS* | XBRL Instance Document. |
101.SCH* | XBRL Taxonomy Extension Schema. |
101.CAL* | XBRL Taxonomy Extension Calculation Linkbase. |
101.DEF* | XBRL Taxonomy Extension Definition Linkbase. |
101.LAB* | XBRL Taxonomy Extension Label Linkbase. |
101.PRE* | XBRL Taxonomy Extension Presentation Linkbase. |
____________________
* Filed herewith.