Attached files
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EX-31.1 - EX-31.1 - COLE KENNETH PRODUCTIONS INC | d28234_ex31-1.htm |
EX-32.1 - EX-32.1 - COLE KENNETH PRODUCTIONS INC | d28234_ex32-1.htm |
EX-32.2 - EX-32.2 - COLE KENNETH PRODUCTIONS INC | d28234_ex32-2.htm |
EX-31.2 - EX-31.2 - COLE KENNETH PRODUCTIONS INC | d28234_ex31-2.htm |
EX-23.1 - EX-23.1 - COLE KENNETH PRODUCTIONS INC | d28234_ex23-1.htm |
EX-10.15 - EX-10.15 - COLE KENNETH PRODUCTIONS INC | d28234_ex10-15.htm |
EXCEL - IDEA: XBRL DOCUMENT - COLE KENNETH PRODUCTIONS INC | Financial_Report.xls |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2011
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-13082
KENNETH COLE PRODUCTIONS, INC. | |||||
(Exact name of registrant as specified in its charter) | |||||
New York | 13-3131650 | ||||
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
603 West 50th Street, New York, NY | 10019 | ||||
(Address of principal executive offices) | (Zip Code) |
(212) 265-1500
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes (X) No ( )
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes (X) No ( )
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. Large accelerated filer ( ) Accelerated filer (X) Non-accelerated filer ( ) (Do not check if a smaller reporting company) Smaller reporting company ( ).
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ( ) No (X)
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date:
Class | August 3, 2011 | |||||||
Class A Common Stock ($.01 par value) | 10,228,165 | |||||||
Class B Common Stock ($.01 par value) | 8,010,497 |
Kenneth Cole Productions, Inc.
Index to Form 10-Q
2
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Kenneth Cole Productions, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(In thousands, except share and per share amounts)
(Unaudited)
June 30, 2011 |
December 31, 2010 |
|||||||
Assets | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 41,231 | $ | 83,395 | ||||
Restricted cash | 15,016 | -- | ||||||
Accounts receivable, net | 36,398 | 35,779 | ||||||
Inventories | 40,716 | 36,539 | ||||||
Prepaid expenses and other current assets | 4,103 | 4,305 | ||||||
Total current assets | 137,464 | 160,018 | ||||||
Property and equipment, at cost, less accumulated depreciation and amortization |
45,937 | 48,862 | ||||||
Other assets: | ||||||||
Intangible assets, net | 9,752 | 7,317 | ||||||
Goodwill | 4,881 | -- | ||||||
Deferred taxes, net | 487 | 528 | ||||||
Investments and other | 4,399 | 4,808 | ||||||
Deferred compensation plans' assets | 43,157 | 41,436 | ||||||
Total other assets | 62,676 | 54,089 | ||||||
Total Assets | $ | 246,077 | $ | 262,969 |
See accompanying notes to condensed consolidated financial statements.
3
Kenneth Cole Productions, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets (continued)
(In thousands, except share and per share amounts)
(Unaudited)
June 30, 2011 |
December 31, 2010 |
|||||||
Liabilities and Shareholders' Equity | ||||||||
Current liabilities: | ||||||||
Accounts payable and accrued expenses | $ | 46,904 | $ | 43,608 | ||||
Other current liabilities | 9,319 | 13,055 | ||||||
Deferred income | 5,879 | 3,069 | ||||||
Total current liabilities | 62,102 | 59,732 | ||||||
Accrued rent and other long-term liabilities | 11,314 | 15,872 | ||||||
Deferred compensation plans' liabilities | 42,124 | 40,630 | ||||||
Commitments and contingencies | ||||||||
Shareholders' Equity: | ||||||||
Series A Convertible Preferred Stock, par value $1.00, 1,000,000 shares authorized, none outstanding | -- | -- | ||||||
Class A Common Stock, par value $.01, 40,000,000 shares authorized; 16,225,703 and 16,070,348 issued as of June 30, 2011 and December 31, 2010, respectively | 162 | 160 | ||||||
Class B Convertible Common Stock, par value $.01, 9,000,000 shares authorized; 8,010,497 issued and outstanding as of June 30, 2011 and December 31, 2010, respectively | 80 | 80 | ||||||
Additional paid-in capital | 112,793 | 110,847 | ||||||
Accumulated other comprehensive loss | (439 | ) | (592 | ) | ||||
Retained earnings | 144,526 | 161,161 | ||||||
257,122 | 271,656 | |||||||
Class A Common Stock in treasury, at cost, 5,999,350 and 5,855,550 shares as of June 30, 2011 and December 31, 2010, respectively | (126,585 | ) | (124,921 | ) | ||||
Total shareholders' equity | 130,537 | 146,735 | ||||||
Total Liabilities and Shareholders' Equity | $ | 246,077 | $ | 262,969 |
See accompanying notes to condensed consolidated financial statements.
4
Kenneth Cole Productions, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(In thousands, except share and per share amounts)
(Unaudited)
Three Months Ended June 30, |
Six Months Ended June 30, |
||||||||||||||||
2011 | 2010 | 2011 | 2010 | ||||||||||||||
Net sales | $ | 91,643 | $ | 96,888 | $ | 199,339 | $ | 196,281 | |||||||||
Royalty revenue | 10,602 | 11,085 | 20,379 | 21,204 | |||||||||||||
Net revenues | 102,245 | 107,973 | 219,718 | 217,485 | |||||||||||||
Cost of goods sold | 60,749 | 60,785 | 136,551 | 124,747 | |||||||||||||
Gross profit | 41,496 | 47,188 | 83,167 | 92,738 | |||||||||||||
Selling, general and administrative expenses | 40,441 | 46,092 | 86,746 | 90,672 | |||||||||||||
Store closing and severance costs | -- | -- | 12,482 | -- | |||||||||||||
Operating income/(loss) | 1,055 | 1,096 | (16,061 | ) | 2,066 | ||||||||||||
Interest and other income, net | 73 | 65 | 120 | 1,032 | |||||||||||||
Impairment of investments | (376 | ) | (48 | ) | (376 | ) | (68 | ) | |||||||||
Income/(loss) before provision for income taxes | 752 | 1,113 | (16,317 | ) | 3,030 | ||||||||||||
Provision for income taxes | 173 | 176 | 306 | 261 | |||||||||||||
Net income/(loss) | $ | 579 | $ | 937 | $ | (16,623 | ) | $ | 2,769 | ||||||||
Earnings/(loss) per share: | |||||||||||||||||
Basic | $ | 0.03 | $ | 0.05 | $ | (0.91 | ) | $ | 0.15 | ||||||||
Diluted | $ | 0.03 | $ | 0.05 | $ | (0.91 | ) | $ | 0.15 | ||||||||
Shares used to compute earnings/(loss) per share: | |||||||||||||||||
Basic | 18,296,000 | 18,146,000 | 18,268,000 | 18,119,000 | |||||||||||||
Diluted | 18,581,000 | 18,517,000 | 18,268,000 | 18,501,000 | |||||||||||||
See accompanying notes to condensed consolidated financial statements.
5
Kenneth Cole Productions, Inc. and Subsidiaries
Condensed Consolidated Statement of Changes in Shareholders' Equity
(In thousands, except share amounts)
(Unaudited)
Class A Common Stock |
Class B Common Stock |
Additional | Accumulated Other |
Treasury Stock | ||||||||||||||||||||||||||||
Number of shares |
Amount | Number of shares |
Amount | Paid-in Capital |
Comprehensive Loss |
Retained Earnings |
Number of Shares |
Amount | Total | |||||||||||||||||||||||
Shareholders' equity December 31, 2010 |
16,070,348 | $ | 160 | 8,010,497 | $ | 80 | $ | 110,847 | $ | (592 | ) | $ | 161,161 | (5,855,550 | ) | $ | (124,921 | ) | $ | 146,735 | ||||||||||||
Net loss | (16,623 | ) | (16,623 | ) | ||||||||||||||||||||||||||||
Translation adjustment for foreign currency | 80 | 80 | ||||||||||||||||||||||||||||||
Unrealized loss on available-for-sale securities | (8 | ) | (8 | ) | ||||||||||||||||||||||||||||
Comprehensive loss | (16,551 | ) | ||||||||||||||||||||||||||||||
Realized loss for non-credit component of impaired securities | 81 | 81 | ||||||||||||||||||||||||||||||
Stock-based compensation expense | 1,900 | 1,900 | ||||||||||||||||||||||||||||||
Exercise of stock options and related tax benefits | 64,242 | 1 | 571 | 572 | ||||||||||||||||||||||||||||
Issuance of restricted stock | 129,970 | 1 | 1 | |||||||||||||||||||||||||||||
Shares surrendered by employees to pay taxes on restricted stock | (43,460 | ) | (575 | ) | (575 | ) | ||||||||||||||||||||||||||
Issuance of Class A Common Stock for Employee Stock Purchase Plan | 4,603 | 50 | 50 | |||||||||||||||||||||||||||||
Repurchase of treasury shares | (143,800 | ) | (1,664 | ) | (1,664 | ) | ||||||||||||||||||||||||||
Dividends associated with vesting of restricted stock | (12 | ) | (12 | ) | ||||||||||||||||||||||||||||
Shareholders' equity June 30, 2011 |
16,225,703 | $ | 162 | 8,010,497 | $ | 80 | $ | 112,793 | $ | (439 | ) | $ | 144,526 | (5,999,350 | ) | $ | (126,585 | ) | $ | 130,537 |
See accompanying notes to condensed consolidated financial statements.
6
Kenneth Cole Productions, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Six Months Ended June 30, |
||||||||
2011 | 2010 | |||||||
Cash flows (used in)/provided by operating activities | ||||||||
Net (loss)/income | $ | (16,623 | ) | $ | 2,769 | |||
Adjustments to reconcile net (loss)/income to net cash (used in)/provided by operating activities: | ||||||||
Depreciation and amortization | 4,930 | 4,542 | ||||||
Provision for doubtful accounts | 131 | (31 | ) | |||||
Benefit from deferred taxes | -- | (555 | ) | |||||
Unrealized loss from investments | 8 | 831 | ||||||
Writedown of investments | 376 | 2 | ||||||
Stock-based compensation expense | 1,900 | 2,084 | ||||||
Tax benefit from stock option exercises and restricted stock vested | (609 | ) | (794 | ) | ||||
Changes in operating assets and liabilities: | ||||||||
Increase in accounts receivable | (750 | ) | (1,971 | ) | ||||
Increase in inventories | (4,177 | ) | (6,090 | ) | ||||
Decrease in prepaid expenses and other current assets | 202 | 6,251 | ||||||
Increase in other assets | (8,707 | ) | (555 | ) | ||||
Increase in accounts payable and accrued expenses | 3,296 | 3,150 | ||||||
(Decrease)/increase in deferred income and other current liabilities | (806 | ) | 2,618 | |||||
Decrease in other long-term liabilities | (3,064 | ) | (606 | ) | ||||
Net cash (used in)/provided by operating activities | (23,893 | ) | 11,645 | |||||
Cash flows used in investing activities | ||||||||
Acquisition of property and equipment | (1,517 | ) | (1,035 | ) | ||||
Deposit in restricted cash account | (15,000 | ) | -- | |||||
Proceeds from sale of investments | -- | 1,055 | ||||||
Purchase of intangible assets | (130 | ) | (139 | ) | ||||
Net cash used in investing activities | (16,647 | ) | (119 | ) | ||||
Cash flows used in financing activities | ||||||||
Shares surrendered by employees to pay taxes on restricted stock | (575 | ) | (705 | ) | ||||
Excess tax benefit from stock options | -- | 1 | ||||||
Proceeds from exercise of stock options | 571 | 8 | ||||||
Proceeds from employee stock purchase plan | 50 | 61 | ||||||
Acquisition of treasury shares | (1,664 | ) | -- | |||||
Dividends associated with vesting of restricted stock | (12 | ) | (97 | ) | ||||
Net cash used in financing activities | (1,630 | ) | (732 | ) | ||||
Effect of exchange rate changes on cash | 6 | (88 | ) | |||||
Net (decrease)/increase in cash | (42,164 | ) | 10,706 | |||||
Cash and cash equivalents, beginning of period | 83,395 | 68,505 | ||||||
Cash and cash equivalents, end of period | $ | 41,231 | $ | 79,211 | ||||
Supplemental disclosures of cash flow information | ||||||||
Cash paid during the period for: | ||||||||
Interest | $ | 21 | $ | 11 | ||||
Income taxes paid/(refunded), net | $ | 387 | $ | (3,790 | ) |
See accompanying notes to condensed consolidated financial statements.
7
Kenneth Cole Productions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared by Kenneth Cole Productions, Inc. and its subsidiaries (the Company) in accordance with accounting principles generally accepted in the United States for interim financial information. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. Certain items contained in these financial statements are based on estimates. In the opinion of the Companys management, the accompanying unaudited condensed consolidated financial statements reflect all significant adjustments, consisting of only normal and recurring adjustments, necessary for a fair presentation of the financial position, results of operations and cash flows for the periods presented. All intercompany transactions have been eliminated.
Operating results for the six months ended June 30, 2011 are not necessarily indicative of the results that may be expected for the year ended December 31, 2011. These unaudited condensed consolidated financial statements should be read in conjunction with the financial statements and footnotes included in the Companys Annual Report on Form 10-K for the year ended December 31, 2010.
The Companys Consolidated Balance Sheet at December 31, 2010, as presented, was derived from the audited financial statements included in the Companys Annual Report on Form 10-K for the year ended December 31, 2010.
2. Restricted Cash
The Company terminated its Asset-Based Lending Facility (ABL) effective March 31, 2011. Given its cash position at that time, barring extraordinary developments, the Company did not anticipate any need for borrowing before December 31, 2011 when the ABL would have expired by its terms. The Company expects to enter into a less expensive long-term credit facility in the near future. Since the ABL had provided a letter of credit arrangement, as a result of its termination, the Company deposited $15.0 million into a restricted cash account as collateral for a comparable amount of irrevocable standby and open commercial letters of credit outstanding. As of June 30, 2011, the Company had $8.8 million of standby and open letters of credit outstanding.
3. Stock-Based Compensation
The Company has stock incentive plans under which directors, officers and other eligible employees receive stock options, restricted stock, and other equity-based awards.
Stock options are granted with an exercise price equal to the market value of a share of the Companys common stock on the date of grant. Stock option grants expire within 10 years and generally vest on a graded basis within three to four years from the date of grant. Restricted stock share awards generally vest on a graded basis over a three to four year period or cliff vest after one year. During the six months ended June 30, 2011 and 2010, the Company granted 21,000 and 557,000 stock options, respectively. The Company granted 18,393 and 71,190 shares of restricted stock during the six months ended June 30, 2011 and 2010, respectively. Stock options outstanding and unvested restricted stock amounted to 2,836,187 and 68,313 shares, respectively, as of June 30, 2011.
8
Kenneth Cole Productions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
3. Stock-Based Compensation (continued)
The following table summarizes the components of stock-based compensation expense for the three and six months ended June 30, 2011 and 2010, which is recorded in Selling, general, and administrative expenses (SG&A) in the Condensed Consolidated Statements of Operations (dollars in thousands):
Three months ended June 30, |
Six months ended June 30, |
||||||||||||||||
2011 | 2010 | 2011 | 2010 | ||||||||||||||
Stock options | $ | 489 | $ | 505 | $ | 1,452 | $ | 858 | |||||||||
Restricted stock awards and employee stock purchase plan | 54 | 445 | 448 | 1,226 | |||||||||||||
Total stock-based compensation expense |
$ | 543 | $ | 950 | $ | 1,900 | $ | 2,084 |
The fair value of stock options was estimated using the Black-Scholes option-pricing model. The following table summarizes the weighted-average assumptions used to compute the fair value of stock option grants for the three and six months ended June 30, 2011 and 2010:
Three months ended June 30, |
Six months ended June 30, |
||||||||||||||||
2011 | 2010 | 2011 | 2010 | ||||||||||||||
Weighted-average volatility | 65.8% | 56.7% | 61.8% | 56.7% | |||||||||||||
Risk-free interest rate | 3.1% | 3.3% | 3.1% to 3.5% | 3.3% to 3.7% | |||||||||||||
Weighted-average dividend yield | 0% | 0% | 0% | 0% | |||||||||||||
Expected term | 3 years | 3 to 9 years | 3 to 5 years | 3 to 9 years |
The fair value of restricted stock was calculated by multiplying the market value of a share of the Companys common stock on the date of grant by the number of shares granted and is amortized on a straight-line basis over the vesting periods.
9
Kenneth Cole Productions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
3. Stock-Based Compensation (continued)
As of June 30, 2011, approximately $3.0 million of unrecognized stock-based compensation expense related to unvested stock options and restricted stock awards, net of estimated forfeitures, is expected to be recognized over a weighted-average period of 1.7 years, compared to approximately $7.4 million of unrecognized stock-based compensation expense to be recognized over a weighted-average period of 2.3 years as of June 30, 2010.
4. Earnings/(Loss) Per Share
Basic earnings/(loss) per share is calculated by dividing net income/(loss) by weighted-average common shares outstanding. Diluted earnings/(loss) per share is calculated similarly, except that it includes the dilutive effect of the assumed exercise of equity based awards under the Companys stock incentive plans. Dilutive securities, which include stock options and restricted stock, are determined under the treasury stock method by calculating the assumed proceeds available to repurchase stock using the weighted-average shares outstanding for the period. Stock options and restricted stock outstanding as of June 30, 2011 and 2010 in an aggregate amount of 2,194,000 and 2,506,000, respectively, have been excluded from the diluted per share calculation as the impact would be antidilutive. All stock options and restricted stock outstanding for the six months ended June 30, 2011 have been excluded from the diluted per share calculation as the impact would be antidilutive. The shares used to calculate basic and diluted earnings/(loss) per common share consists of the following:
Three Months Ended | Six Months Ended | |||||||||||||||||||
June 30, 2011 |
June 30, 2010 |
June 30, 2011 |
June 30, 2010 |
|||||||||||||||||
Weighted-average common shares outstanding | 18,296,000 | 18,146,000 | 18,268,000 | 18,119,000 | ||||||||||||||||
Effect of dilutive securities: | ||||||||||||||||||||
Restricted stock and employee stock purchase plan | 85,000 | 167,000 | -- | 193,000 | ||||||||||||||||
Stock options | 200,000 | 204,000 | -- | 189,000 | ||||||||||||||||
Weighted-average common shares outstanding and common share equivalents | 18,581,000 | 18,517,000 | 18,268,000 | 18,501,000 |
10
Kenneth Cole Productions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
5. Investments
The Company reviews its investments for other-than-temporary impairment whenever the fair value of an investment is less than carrying value and evidence indicates that an investments carrying value may not be recoverable within a reasonable period of time. In the Companys evaluation of its investments, it also considered its ability and intent to hold the investment until the market price recovers, the reasons for the decline in fair value, the duration of the decline in fair value and expected future performance. Based on an independent third-party appraisal, the Company recorded an other-than-temporary impairment of investments of $0.4 million related to auction-rate securities within Impairment of investments in the Condensed Consolidated Statements of Operations during the three and six months ended June 30, 2011.
During the six months ended June 30, 2010, the Company sold a portion of its equity investments. The cost basis of the equity investment sold was $0.2 million, which was determined utilizing the specified identification method. The proceeds from the sale were $1.0 million, resulting in a net realized gain of $0.8 million, which is recorded in Interest and other income, net in the Condensed Consolidated Statement of Operations.
The following table presents gross unrealized gains on, and estimated fair value of, the Companys auction-rate securities as of June 30, 2011 and December 31, 2010 (in thousands):
Historical | (1) | Estimated Fair |
Other than Temporary |
Gross Unrealized | ||||||||||||||||
Cost |
Cost Basis |
Value | Impairment | Gains | Losses | |||||||||||||||
June 30, 2011 | $ | 6,100 | $ | 2,129 | $ | 2,213 | -- | $ | 84 | -- | ||||||||||
December 31, 2010 | 6,100 | 2,424 | 2,516 | -- | 92 | -- |
(1) The cost basis is historical cost less other-than-temporary impairment charged to income. |
The Company had $1.4 million of non-credit other-than-temporary impairments for auction-rate securities recorded in Accumulated other comprehensive loss at June 30, 2011.
11
Kenneth Cole Productions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
6. Fair Value Measurement
The Companys financial assets, measured at fair value on a recurring basis, were as follows (in thousands):
Fair Value at June 30, 2011 |
Fair Value at December 31, 2010 |
Hierarchy | |||||||||
Deferred compensation plans' assets | $ | 38,131 | $ | 36,473 | Level 2 | ||||||
Auction-rate securities | 2,213 | 2,516 | Level 3 |
A Level 1 hierarchy represents a fair value that is derived from unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date. A Level 2 hierarchy represents a fair value that is derived from inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. The deferred compensation plans' assets are primarily comprised of interests in limited partnerships that invest in a variety of assets including publicly traded equity securities, debt securities and privately-held companies. The general partners that manage the limited partnerships determine the fair value of the plans investment by determining the net asset valuation in accordance with applicable accounting standards. Certain of these investments have short-term lockup provisions and redemption restrictions which require advance notice for redemption. Management does not believe that these short-term lockup provisions and redemption restrictions affect the plans ability to transact redemptions at the net asset value. A Level 3 hierarchy represents a fair value that is derived from inputs that are unobservable or from observable inputs based on unobservable data in an inactive market. The fair value of the Companys auction-rate securities is determined from an independent third-party valuation. The primary variables used in determining fair value include collateral, rating, insurance, credit risk and downgrade risk of the security. Maturity dates for these auction-rate securities range from 2033 to 2050.
The following table presents the reconciliation of the beginning and ending fair value measurements of the Companys Level 3 assets, auction-rate securities, measured at fair value using observable inputs based on unobservable data in an inactive market for the six months ended June 30, 2011 and 2010 (in thousands):
June 30, 2011 | June 30, 2010 | ||||||||||
Beginning balance | $ | 2,516 | $ | 3,529 | |||||||
Unrealized loss recorded in Accumulated other comprehensive loss | (8 | ) | (116 | ) | |||||||
Impairment charge included in Statement of Operations | (295 | ) | (2 | ) | |||||||
Ending balance | $ | 2,213 | $ | 3,411 |
12
Kenneth Cole Productions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
6. Fair Value Measurement (continued)
The Company recorded a $0.4 million and $0.1 million writedown in its auction-rate securities within Impairment of investments in the Condensed Consolidated Statements of Operations during the six months ended June 30, 2011 and 2010, respectively.
7. Acquisition of Womens Sportswear Business
On June 1, 2011, in connection with the Companys strategic decision to transition the womens sportswear business from a licensed to a wholly owned operation in the Wholesale segment, the Company acquired certain net assets from its licensee, Bernard Chaus, Inc. (Chaus), in exchange for consideration of approximately $5.1 million, all of which was outstanding as of June 30, 2011 and included in Accounts payable and accrued expenses on the Condensed Consolidated Balance Sheet. Chaus was the Companys licensee for womens sportswear apparel and accessories until the termination of the licensing agreement.
The Company accounted for the womens sportswear division acquisition as a business combination. Based on an independent third-party appraisal, the acquisition cost of $5.1 million (excluding insignificant transaction costs) has been allocated on a preliminary basis to the net assets acquired based on their respective fair values as follows: customer relationship intangible asset of $2.5 million; goodwill of $4.9 million, which is deductible for tax purposes over its amortizable tax life; and current liabilities of $2.3 million. The Company is in the process of completing its assessment of the fair value of assets acquired and liabilities assumed for the allocation of the purchase price. As a result, the estimated purchase price allocation is subject to change.
The customer relationship intangible asset was valued using the excess earnings method. This method discounts the estimated after tax cash flows associated with the existing base of customers as of the acquisition date, factoring in expected attrition of the existing customer base. The customer relationship intangible asset will be amortized over an estimated useful life of 19 years, which is the weighted-average amortization period of the intangible asset. Amortization expense will be recorded within SG&A in the Condensed Consolidated Statement of Operations. Goodwill is not amortized, but is assessed for impairment at least annually based on comparisons of fair values to carrying values.
8. Comprehensive Income/(loss)
Comprehensive income/(loss) is comprised of net income/(loss), the effect of foreign currency translation and changes in unrealized gains and losses on available-for-sale securities. Comprehensive income for the three months ended June 30, 2011 amounted to $0.3 million. Comprehensive loss for the six months ended June 30, 2011 amounted to $16.6 million. Comprehensive income for the three and six months ended June 30, 2010 amounted to $0.6 million and $1.2 million, respectively.
13
Kenneth Cole Productions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The Company designs and sources a broad range of fashion footwear, handbags, accessories, and apparel and has three reportable segments: Wholesale, Consumer Direct and Licensing. The Wholesale segment markets footwear, handbags and mens and womens apparel products for sale to approximately 5,200 domestic department and specialty store locations, the Companys Consumer Direct segment and international retailers. The Consumer Direct segment markets a broad selection of the Companys branded products, including licensee products, for sale directly to the consumer through its own channels of distribution, which include full-priced retail stores, Company Stores (outlets) and its e-commerce website (at website address www.kennethcole.com). The Licensing segment, through third-party licensee agreements, has evolved the Company from primarily a footwear resource to a diverse global lifestyle brand competing effectively in approximately 30 apparel and accessories categories for men, women and children. The Company maintains control over quality, brand image and distribution of the licensees' products. The segment consists primarily of royalties earned on domestic and international licensee sales to third parties of products bearing the Companys trademarks and trade names.
The Companys reportable segments are business units that offer products to overlapping consumers through different channels of distribution. Each segment is managed separately, while results across segments are reviewed by the executive management committee. The Company evaluates performance of each of its segments and allocates resources based on profit or loss before store closing and severance costs, stock-based compensation expense, writedown of available-for-sale securities, impairment of intangible and long-lived assets, unallocated corporate overhead and income taxes for each segment.
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Kenneth Cole Productions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
9. Segment Information (continued)
Financial information of the Companys reportable segments is as follows (in thousands):
Three Months Ended June 30, 2011 |
Six Months Ended June 30, 2011 |
||||||||||||||||||||||||||||
Wholesale | Consumer Direct |
Licensing | Totals | Wholesale | Consumer Direct |
Licensing | Totals | ||||||||||||||||||||||
Net revenues | $ | 51,982 | $ | 39,661 | $ | 10,602 | $ | 102,245 | $ | 126,490 | $ | 72,849 | $ | 20,379 | $ | 219,718 | |||||||||||||
Segment (loss)/income (1)(2) | (4,446 | ) | (692 | ) | 8,777 | 3,639 | (4,866 | ) | (9,712 | ) | 16,623 | 2,045 | |||||||||||||||||
Segment assets (3) | 190,987 | 42,240 | 12,850 | 246,077 |
Three Months Ended June 30, 2010 |
Six Months Ended June 30, 2010 |
||||||||||||||||||||||||||||
Wholesale | Consumer Direct |
Licensing | Totals | Wholesale | Consumer Direct |
Licensing | Totals | ||||||||||||||||||||||
Net revenues | $ | 52,068 | $ | 44,820 | $ | 11,085 | $ | 107,973 | $ | 114,503 | $ | 81,778 | $ | 21,204 | $ | 217,485 | |||||||||||||
Segment income/(loss) (1)(2) |
227 | (4,422 | ) | 8,536 | 4,341 | 2,379 | (9,478 | ) | 16,348 | 9,249 | |||||||||||||||||||
Segment assets (3) | 173,239 | 45,914 | 36,693 | 255,846 |
_________________
(1) | Excludes store
closing and severance costs, stock-based compensation expense, writedown of available-for-sale securities, impairment of intangible and long-lived assets, unallocated corporate overhead and income taxes. |
(2) | The Wholesale segment includes primarily all of the Companys allocated corporate overhead. |
(3) | The Wholesale segment includes corporate assets. |
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Kenneth Cole Productions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
9. Segment Information (continued)
The reconciliation of the Companys reportable segment income/(loss) is as follows (in thousands):
Three Months Ended | Six Months Ended | |||||||||||||
June 30, 2011 | June 30, 2010 | June 30, 2011 | June 30, 2010 | |||||||||||
Income/(loss) | ||||||||||||||
Total income for reportable segments (1) | $ | 3,639 | $ | 4,341 | $ | 2,045 | $ | 9,249 | ||||||
Adjustment for store closing and severance costs, stock- based compensation expense, writedown of available- for-sale securities, impairment of intangible and long- lived assets and unallocated corporate overhead |
(2,887 | ) | (3,228 | ) | (18,362 | ) | (6,219 | ) | ||||||
Total income/(loss) before provision for income taxes | $ | 752 | $ | 1,113 | $ | (16,317 | ) | $ | 3,030 |
(1) Excludes store closing and severance costs, stock-based compensation expense, writedown of available-for-sale securities, impairment of intangible and long-lived assets, unallocated corporate overhead and income taxes |
Revenues from international customers were approximately 6.9% and 5.4% of the Companys consolidated revenues for the three months ended June 30, 2011 and 2010, respectively, and approximately 7.9% and 6.4% of the Companys consolidated revenues for the six months ended June 30, 2011 and June 30, 2010, respectively.
10. Income Taxes
The Company remains substantially in a fully valued deferred tax position for federal income tax purposes and is in a loss position for the six months ended June 30, 2011. Accordingly, income taxes for 2011 primarily represent state, local and foreign jurisdiction taxes.
11. Store Closing and Severance Costs
During the six months ended June 30, 2011, the Company recorded $7.0 million of net store closing costs within the Consumer Direct segment and $5.5 million of severance costs within the Wholesale and Consumer Direct segments. The expenses are included within Store closing and severance costs in the Condensed Consolidated Statement of Operations. During the six months ended June 30, 2011 the Company paid all amounts related to the store closing costs. As of June 30, 2011, the Company had accrued severance costs of $3.0 million which are expected to be paid through the third quarter of 2012.
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Kenneth Cole Productions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
11. Store Closing and Severance Costs (continued)
As of June 30, 2011 the Company had accrued store closing costs of $1.2 million related to 2010 store closings which are expected to be paid through the third quarter of 2013.
12. Related Party Transaction
The Company recorded expenses of approximately $0.3 million and $0.1 million for the three months ended June 30, 2011 and 2010, respectively, to a third-party aviation company which hires and uses an aircraft partially owned by Emack LLC, a company which is wholly owned by the Companys Chairman and Chief Creative Officer. During the six months ended June 30, 2011 and 2010, the Company recorded expenses of approximately $0.3 million and $0.1 million, respectively. Management believes that all transactions were made on terms and conditions similar to or more favorable than those available in the marketplace from unrelated parties.
13. Common Stock Repurchase
During the three and six months ended June 30, 2011, the Company repurchased 143,800 of its shares at an aggregate price of $1.7 million. No shares were repurchased by the Company during the three and six months ended June 30, 2010.
The Company had 2,929,000 and 3,072,800 shares available for repurchase as of June 30, 2011 and 2010, respectively, from authorization by the Companys Board of Directors for the Companys common stock repurchase plan.
14. New Accounting Pronouncement
In June 2011, the FASB issued ASU 2011-05, Presentation of Comprehensive Income. Under the amendments to Topic 220, Comprehensive Income, an entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. This eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders' equity. The amendments do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. The guidance in ASU 2011-05 is effective for public companies for fiscal years, and interim periods within those years beginning after December 15, 2011. The Company expects that ASU 2011-05 will not have a material impact on the Companys consolidated financial statements.
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Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements Disclosure
The statements contained in this report which are not historical facts, including, without limitation, statements that relate to future performance and/or statements regarding Kenneth Cole Production, Inc.s (the Company) anticipated results or level of business for 2011 or any other future period, may be deemed to constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are based on current expectations only, and actual future results might differ materially from those projected in such statements due to a number of risks and uncertainties, including, but not limited to, demand and competition for the Companys products, the ability to enter into new licensee agreements, to maintain and renew existing licensing agreements, changes in consumer preferences or fashion trends, events causing disruption in product shipment, change in import regulations, dependence on certain large customers, changes in the Companys relationships with vendors and other resources, the launching or prospective development of new business initiatives, future licensee sales growth, gross margins, store expansion, openings and closings, changes in distribution centers and implementation of management information systems. The forward-looking statements contained herein are also subject to other risks and uncertainties that are described in the Companys reports and registration statements filed with the Securities and Exchange Commission. The Company undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future results or otherwise.
Update on Critical Accounting Policies and Estimates
The Companys Condensed Consolidated Financial Statements are prepared in accordance with accounting principles generally accepted in the United States, which require the Company to make estimates in the application of its accounting policies based on the best assumptions, judgments and opinions of management. For a summary of the Companys significant accounting policies, see the Companys Consolidated Financial Statements included in the Companys Annual Report on Form 10-K for the year ended December 31, 2010 except as follows:
Goodwill
Upon the completion of an acquisition, the Company estimates and records the fair value of purchased assets, including tangible and intangible assets. The fair value of intangible assets is estimated based on managements assessment, considering independent third-party appraisals when necessary. The excess of the purchase consideration over the fair value of net assets acquired is recorded as goodwill. Goodwill is not amortized.
Goodwill impairment, which is assessed at least annually, is determined using a two-step process. The first step of the goodwill impairment test is to identify potential impairment by comparing the fair value of a reporting unit with its net book value (or carrying amount), including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not to be impaired and performance of the second step of the impairment test is unnecessary. If the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwill impairment test is performed to measure the amount of impairment loss, if any. The second step of the goodwill impairment test compares the implied fair value of the reporting units goodwill with the carrying amount of that goodwill. If the carrying amount of the reporting units goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination. That is, the fair value of the reporting unit is allocated to all of the assets and liabilities of that unit (including any unrecognized intangible assets) as if the reporting unit had been acquired in a business combination and the fair value was the purchase price paid to acquire the reporting unit.
Determining the fair value of a reporting unit under the first step of the goodwill impairment test and determining the fair value of individual assets and liabilities of a reporting unit (including unrecognized intangible assets) under the second step of the goodwill impairment test is judgmental in nature and often involves the use of significant estimates and assumptions. Similarly, estimates and assumptions are used in determining the fair value of other intangible assets. These estimates and assumptions could have a significant impact on whether or not an impairment charge is recognized and the magnitude of any such charge. To assist management in the process of determining goodwill impairment, we review and consider appraisals from independent valuation firms. Estimates of fair value are primarily determined using discounted cash flows, market comparisons and recent transactions. These approaches use significant estimates and assumptions, including projected future cash flows (including timing), discount rates reflecting the risks inherent in future cash flows, perpetual growth rates and determination of appropriate market comparables.
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Overview
The Company designs, sources and markets a broad range of fashion footwear, handbags and apparel and, through license agreements, designs and markets apparel and accessories under its Kenneth Cole New York, Kenneth Cole Reaction, Unlisted and Le Tigre brand names, as well as footwear under the proprietary trademark Gentle Souls. In addition, the Company designs, develops and sources private label footwear and handbags for selected retailers. The Companys products are targeted to appeal to modern fashion conscious consumers who seek accessible designer fashion that reflects a metropolitan lifestyle. These products include core basics that generally remain in demand from season to season and fashion products that are designed to establish or capitalize on market trends. The combination of core products and fashion styles provides freshness in assortments and maintains a fashion-forward image, while a multiple brand strategy helps diversify business risk.
The Company markets its products to approximately 5,200 domestic department and specialty store locations, the Companys full-priced retail stores, outlet stores, and its e-commerce website, as well as internationally through its licensee partners and international retailers. The Company believes the diversity of its product offerings distinguishes the Company from its competitors in terms of product classifications (mens, womens and childrens footwear, apparel and accessories), prices (bridge, better and moderate) and styling. The Company believes the diversity of its product mix provides balance to its overall sales and increases opportunities in all channels of distribution.
The popularity of the Kenneth Cole brand names, including Kenneth Cole New York, Kenneth Cole Reaction and Unlisted, among consumers has enabled the Company to expand its product offerings and channels of distribution through licensing agreements. The Company offers, through these agreements, a lifestyle collection of mens product categories, including tailored clothing, dress shirts, dress pants, neckwear, outerwear, sleepwear, socks, underwear, belts, business cases, small leather goods, sunglasses, prescription eyewear, watches, jewelry, and fragrance. Womens product categories currently being sold pursuant to license agreements include outerwear, swimwear, sleepwear, small leather goods, belts, sunglasses, prescription eyewear, watches, jewelry and fragrance. In addition, the Company licenses luggage and childrens apparel. In October 2010, the Company announced that it had made the strategic decision to terminate the licensing agreement with its womens sportswear licensee effective June 1, 2011, and has brought the business in-house.
The Company recorded net revenues of $102.2 million and $219.7 million for the three and six months ended June 30, 2011, respectively. Diluted earnings per share was $0.03 for the three months ended June 30, 2011 as compared to diluted earnings per share of $0.05 for the three months ended June 30, 2010. Diluted loss per share was $(0.91) for the six months ended June 30, 2011 as compared to diluted earnings per share of $0.15 for the six months ended June 30, 2010. Included in the diluted loss per share for the six months ended June 30, 2011 were expenses of $12.5 million for store closing and severance costs. Cash, cash equivalents and restricted cash were $56.2 million at June 30, 2011 versus $79.2 million at June 30, 2010. At June 30, 2011, the Company had no long-term debt.
Recent Developments
On June 1, 2011, in connection with the Companys strategic decision to transition the womens sportswear business from a licensed to a wholly owned operation in the Wholesale segment, the Company acquired certain net assets from its licensee, Bernard Chaus, Inc. (Chaus), in exchange for consideration of approximately $5.1 million, all of which was outstanding as of June 30, 2011 and included in Accounts payable and accrued expenses on the Condensed Consolidated Balance Sheet. Chaus was the Companys licensee for womens sportswear apparel and accessories until the termination of the licensing agreement.
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The Company accounted for the womens sportswear division acquisition as a business combination. Based on an independent third-party appraisal, the acquisition cost of $5.1 million (excluding insignificant transaction costs) has been allocated on a preliminary basis to the net assets acquired based on their respective fair values as follows: customer relationship intangible asset of $2.5 million; goodwill of $4.9 million, which is deductible for tax purposes over its amortizable tax life; and current liabilities of $2.3 million. The Company is in the process of completing its assessment of the fair value of assets acquired and liabilities assumed for the allocation of the purchase price. As a result, the estimated purchase price allocation is subject to change.
The customer relationship intangible asset was valued using the excess earnings method. This method discounts the estimated after tax cash flows associated with the existing base of customers as of the acquisition date, factoring in expected attrition of the existing customer base. The customer relationship intangible asset will be amortized over an estimated useful life of 19 years, which is the weighted-average amortization period of the intangible assets. Amortization expense will be recorded within selling, general and administrative expenses (SG&A) in the Condensed Consolidated Statement of Operations. Goodwill is not amortized, but is assessed for impairment at least annually based on comparisons of fair values to carrying values.
On June 20, 2011 Paul Blum joined the Company as Chief Executive Officer. Kenneth D. Cole stepped down as Interim Chief Executive Officer of the Company and remained Executive Chairman of the Board of Directors and Chief Creative Officer. In addition, Mr. Blum was elected to join the Companys Board of Directors.
Results of Operations
The following table sets forth the Companys Condensed Consolidated Statements of Operations in thousands of dollars and as a percentage of net revenues for the three and six months ended June 30, 2011 and June 30, 2010.
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||||||||
2011 | 2010 | 2011 | 2010 | ||||||||||||||||||||||||||
Net sales | $ | 91,643 | 89.6 | % | $ | 96,888 | 89.7 | % | $ | 199,339 | 90.7 | % | $ | 196,281 | 90.3 | % | |||||||||||||
Royalty revenue | 10,602 | 10.4 | 11,085 | 10.3 | 20,379 | 9.3 | 21,204 | 9.7 | |||||||||||||||||||||
Net revenues | 102,245 | 100.0 | 107,973 | 100.0 | 219,718 | 100.0 | 217,485 | 100.0 | |||||||||||||||||||||
Gross profit (1) | 41,496 | 40.6 | 47,188 | 43.7 | 83,167 | 37.9 | 92,738 | 42.6 | |||||||||||||||||||||
Selling, general and administrative expenses | 40,441 | 39.6 | 46,092 | 42.7 | 86,746 | 39.5 | 90,672 | 41.7 | |||||||||||||||||||||
Store closings and severance costs | -- | -- | -- | -- | 12,482 | 5.7 | -- | -- | |||||||||||||||||||||
Operating income/(loss) | 1,055 | 1.0 | 1,096 | 1.0 | (16,061 | ) | (7.3 | ) | 2,066 | 0.9 | |||||||||||||||||||
Interest and other income, net | 73 | 0.0 | 65 | 0.0 | 120 | 0.0 | 1,032 | 0.5 | |||||||||||||||||||||
Impairment of investments | (376 | ) | (0.3 | ) | (48 | ) | 0.0 | (376 | ) | (0.1 | ) | (68 | ) | 0.0 | |||||||||||||||
Income/(loss) before income taxes | 752 | 0.7 | 1,113 | 1.0 | (16,317 | ) | (7.4 | ) | 3,030 | 1.4 | |||||||||||||||||||
Income tax expense | 173 | 0.1 | 176 | 0.1 | 306 | 0.1 | 261 | 0.1 | |||||||||||||||||||||
Net income/(loss) | $ | 579 | 0.6 | % | $ | 937 | 0.9 | % | $ | (16,623 | ) | (7.5 | )% | $ | 2,769 | 1.3 | % |
_______________________
(1) Gross profit may not be comparable to other entities, since some entities include the costs related to their distribution network (receiving and warehousing) in cost of goods sold and other entities, similar to the Company, exclude these costs from gross profit, including them instead in a line item such as selling, general and administrative expenses. |
Three Months Ended June 30, 2011 Compared to Three Months Ended June 30, 2010
NET REVENUES: Net revenues decreased 5.3%, or $5.8 million, to $102.2 million for the three months ended June 30, 2011 from $108.0 million for the three months ended June 30, 2010. The decrease in revenues is primarily due to the Companys closing of nineteen stores since June 30, 2010. Excluding sales from closed stores, net revenues were approximately flat.
NET SALES: Wholesale net sales were approximately flat at $52.0 million for the three months ended June 30, 2011 compared to $52.1 million for the three months ended June 30, 2010. A decrease in footwear sales was offset by an increase in apparel sales.
Net sales in the Companys Consumer Direct segment decreased 11.5%, or $5.2 million, to $39.6 million for the three months ended June 30, 2011 from $44.8 million for the three months ended June 30, 2010. Sales decreased primarily as a result of the closing of stores over the past twelve months which had net sales of $6.2 million for the three months ended June 30, 2010, and a comparable store sales decrease of 1.7%, or $0.6 million. The reduction in comparable store sales was partially offset by incremental sales from stores opened after June 30, 2010 that were not included in comparable store sales. Comparable stores
20
are defined as new stores that are open for longer than thirteen months. A store that stops operations is included in the comparable sales calculation through the date of closing. The Company closed two full-priced retail stores during the three months ended June 30, 2011 as compared to opening one outlet and closing one full-priced retail store and one outlet during the three months ended June 30, 2010.
ROYALTY REVENUE: Royalty revenue decreased 4.4%, or $0.5 million, to $10.6 million for the three months ended June 30, 2011 from $11.1 million for the three months ended June 30, 2010. Contractual minimums for the Le Tigre license with JC Penney ceased during the third quarter of 2010 as the license was not renewed through a mutual agreement. The Company recorded no licensing revenue for Le Tigre during the three months ended June 30, 2011 versus $0.9 million during the three months ended June 30, 2010. This decrease was partially offset by an increase in contractual royalty minimums. Excluding Le Tigre, royalty revenue increased 4.5%.
GROSS PROFIT: Consolidated gross profit, as a percentage of net revenues, decreased to 40.6% for the three months ended June 30, 2011 from 43.7% for the three months ended June 30, 2010. The 310 basis point decrease resulted primarily from decreases within the Wholesale segment due to ongoing cost pressures on initial mark-ups and increased dilution as well as additional markdowns in Consumer Direct to clear inventory resulting from the Companys decision to accelerate the closure of unproductive stores. In addition, the decrease, as a percentage of net revenues, was due to the revenue mix shifting to the Wholesale segment. For the near term, the Company believes the shift in sales mix to the Wholesale segment will continue and accordingly the consolidated gross profit, as a percentage of net revenues, is expected to be lower year over year. The Consumer Direct segment, which operates at a higher gross profit level than the Wholesale segment, had decreased revenues as a percentage of net revenues to 38.8% for the three months ended June 30, 2011 compared to 41.5% for the three months ended June 30, 2010, while the Wholesale segment revenues, as a percentage of net revenues, increased to 50.8% for the three months ended June 30, 2011 from 48.2% for the three months ended June 30, 2010. The revenues in the Licensing segment, which carries nominal cost of goods sold, increased, as a percentage of net revenues, to 10.4% for the three months ended June 30, 2011 compared to 10.3% for the three months ended June 30, 2010.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES: SG&A expenses, including warehousing and receiving expenses, as a percentage of net revenues, decreased 310 basis points to 39.6% for the three months ended June 30, 2011 as compared to 42.7% for the three months ended June 30, 2010. Total SG&A decreased $5.7 million to $40.4 million for the three months ended June 30, 2011 from $46.1 million for the three months ended June 30, 2010. The decrease in SG&A expenses was the result of an ongoing focus on cost efficiencies and the elimination of overhead related to closed, unproductive retail stores slightly offset with costs associated with startup of the womens and Reaction mens apparel businesses. For the balance of the year, the Company believes the shift in sales mix to the Wholesale segment will continue and accordingly, the Consolidated SG&A expenses, as a percentage of net revenues, are expected to decrease year over year.
IMPAIRMENT OF INVESTMENTS: Impairment of investments, which were other-than-temporary impairments of auction-rate securities, was $0.4 million for the three months ended June 30, 2011 and $0.1 million for the three months ended June 30, 2010. The fair value of the Companys auction-rate securities was determined utilizing an independent appraiser. The primary variables used in determining fair value include collateral, rating, insurance, credit risk and downgrade risk of the security.
INCOME TAXES: The Company does not expect to pay federal income taxes in 2011 based on its carryforward net operating losses. The Companys effective tax rate was 23.0% for the three months ended June 30, 2011 compared to 15.8% for the three months ended June 30, 2010. Total income tax expense for the three months ended June 30, 2011 and 2010 was $0.2 million. Income tax expense in each period is comprised of state, local, and foreign jurisdiction taxes.
NET INCOME: As a result of the foregoing, the Company recorded net income of $0.6 million or 0.6% of net revenues for the three months ended June 30, 2011 as compared to net income of $0.9 million, or 0.9% of net revenues for the three months ended June 30, 2010.
Six Months Ended June 30, 2011 Compared to Six Months Ended June 30, 2010
NET REVENUES: Net revenues increased 1.0%, or $2.2 million, to $219.7 million for the six months ended June 30, 2011 from $217.5 million for the six months ended June 30, 2010. Double-digit revenue growth in the Wholesale segment was partially offset by decreases in the Consumer Direct segment due to store closings. Excluding sales from closed stores, net revenues increased 6.1%.
NET SALES: Wholesale net sales increased 10.5%, or $12.0 million, to $126.5 million for the six months ended June 30, 2011 from $114.5 million for the six months ended June 30, 2010. The increase was primarily attributable to additional sales of $12.5 million for footwear and apparel partially offset by decreases in the handbag business.
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Net sales in the Companys Consumer Direct segment decreased 10.9%, or $9.0 million, to $72.8 million for the six months ended June 30, 2011 from $81.8 million for the six months ended June 30, 2010. Sales decreased primarily as a result of the closing of stores over the past twelve months which had net sales of $10.5 million for the six months ended June 30, 2010, and a comparable store sales decrease of 2.2%, or $1.3 million. The reduction in comparable store sales was partially offset by incremental sales from stores opened after June 30, 2010 that were not included in comparable store sales. Comparable stores are defined as new stores that are open for longer than thirteen months. A store that stops operations is included in the comparable sales calculation through the date of closing. During the six months ended June 30, 2011, the Company opened two outlets and closed nine full-priced retail stores and one outlet. During the six months ended June 30, 2010, the Company opened one outlet and closed one full-priced retail store and one outlet.
ROYALTY REVENUE: Royalty revenue decreased 3.9%, or $0.8 million, to $20.4 million for the six months ended June 30, 2011 from $21.2 million for the six months ended June 30, 2010. Contractual minimums for the Le Tigre license with JC Penney ceased during the third quarter of 2010 as the license was not renewed through a mutual agreement. The Company recorded no licensing revenue for Le Tigre during the six months ended June 30, 2011 versus $1.9 million during the six months ended June 30, 2010. This decrease was partially offset by an increase in contractual royalty minimums. Excluding Le Tigre, royalty revenue increased 5.4%.
GROSS PROFIT: Consolidated gross profit, as a percentage of net revenues, decreased to 37.9% for the six months ended June 30, 2011 from 42.6% for the six months ended June 30, 2010. The 470 basis point decrease resulted from decreases at both the Wholesale and Consumer Direct segments due to increasing cost pressures in the Wholesale segment on initial mark-ups and the aggressive markdowns in Consumer Direct to clear excess inventory resulting from the Companys decision to accelerate the closure of unproductive stores. In addition, the decrease, as a percentage of net revenues, was due to the revenue mix shifting to the Wholesale segment. The Company believes in the near term the shift in sales mix to the Wholesale segment will continue and accordingly the consolidated gross profit, as a percentage of net revenues, is expected to be lower year over year. The Consumer Direct segment, which operates at a higher gross profit level than the Wholesale segment, had decreased revenues as a percentage of net revenues to 33.1% for the six months ended June 30, 2011 from 37.6% for the six months ended June 30, 2010, while the Wholesale segment revenues, as a percentage of net revenues, increased to 57.6% for the six months ended June 30, 2011 from 52.7% for the six months ended June 30, 2010. The revenues in the Licensing segment, which carries nominal cost of goods sold, decreased, as a percentage of net revenues, to 9.3% for the six months ended June 30, 2011 compared to 9.7% for the six months ended June 30, 2010.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES: SG&A expenses, including warehousing and receiving expenses, as a percentage of net revenues, decreased 220 basis points to 39.5% for the six months ended June 30, 2011 as compared to 41.7% for the six months ended June 30, 2010. Total SG&A decreased $4.0 million to $86.7 million for the six months ended June 30, 2011 from $90.7 million for the six months ended June 30, 2010. The decrease in SG&A expenses was driven primarily from closed retail stores and reductions in payroll and payroll related expenses slightly offset by costs associated with startup of the womens and Reaction mens apparel businesses during six months ended June 30, 2011. In the near term, the Company believes the shift in sales mix to the Wholesale segment will continue and accordingly, the Consolidated SG&A expenses, as a percentage of net revenues, are expected to decrease year over year.
STORE CLOSING AND SEVERANCE COSTS: The Company closed eight stores during the six months ended June 30, 2011 and incurred approximately $7.0 million in net costs for contract lease terminations and other related costs to close the stores. In addition, approximately $5.5 million of severance was recorded during the six months ended June 30, 2011.
INTEREST AND OTHER INCOME, NET: Interest and other income, net decreased $0.9 million to approximately $0.1 million for the six months ended June 30, 2011 as compared to $1.0 million for the six months ended June 30, 2010. The decrease is primarily due to the Company realizing a $0.8 million gain on the sale of a portion of the Companys equity investments during the six months ended June 30, 2010.
IMPAIRMENT OF INVESTMENTS: Impairment of investments, which were other-than-temporary impairments of auction-rate securities, was $0.4 million for the six months ended June 30, 2011 and $0.1 million for the six months ended June 30, 2010. The fair value of the Companys auction-rate securities was determined utilizing an independent appraiser. The primary variables used in determining fair value include collateral, rating, insurance, credit risk and downgrade risk of the security.
INCOME TAXES: The Company does not expect to pay federal income taxes in 2011 based on its carryforward net operating losses. The Companys effective tax rate was 1.9% for the six months ended June 30, 2011 compared to 8.6% for the six months ended June 30, 2010. Total income tax expense for the six months ended June 30, 2011 and 2010 was $0.3 million. Income tax expense in each period is comprised of state, local, and foreign jurisdiction taxes.
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NET (LOSS)/INCOME: As a result of the foregoing, the Company recorded a net loss of $16.6 million or (7.5)% of net revenues for the six months ended June 30, 2011 as compared to net income of $2.8 million, or 1.3% of net revenues for the six months ended June 30, 2010.
New Accounting Pronouncement
Please refer to Footnote 14 for the Companys new accounting pronouncement disclosure.
Related Party Transaction
Please refer to Footnote 12 for the Companys related party transaction disclosure.
Liquidity and Capital Resources
As of June 30, 2011, the Company had $56.2 million in cash, cash equivalents and restricted cash, which consist primarily of money market funds. The Company uses cash from operations as the primary source of financing its capital expenditures and seasonal requirements. Cash needs vary from time to time as a result of the timing of the receipt of merchandise from suppliers, the delivery by the Company of merchandise to its wholesale customers and its retail stores and the level of inventory and accounts receivable balances. At June 30, 2011 and December 31, 2010, working capital was $75.4 million and $100.3 million, respectively.
Cash used in operating activities was $23.9 million for the six months ended June 30, 2011, compared to cash provided by operating activities of $11.6 million for the six months ended June 30, 2010. The increase in cash used in operating activities was primarily attributable to $7.0 million paid for lease contract termination payments, an increase in other assets and a decrease in other long-term liabilities.
Net cash used in investing activities totaled $16.6 million for the six months ended June 30, 2011 compared to $0.1 million for the six months ended June 30, 2010. The increase in cash used by investing activities resulted primarily from the Company depositing $15.0 million into a restricted cash account which serves as collateral for irrevocable standby and open letters of credit. In addition, the increase in cash used by investing activities was attributable to capital expenditure additions of $0.5 million during the six months ended June 30, 2011 as compared to June 30, 2010 and the proceeds of $1.0 million from the sales of a portion of an equity investment during the six months ended June 30, 2010.
Net cash used in financing activities was $1.6 million for the six months ended June 30, 2011 compared to $0.7 million for the six months ended June 30, 2010. The increase was primarily attributable to $1.7 million used to repurchase 143,800 treasury shares during the six months ended June 30, 2011 partially offset by an increase of $0.6 million for proceeds from the exercise of stock options.
During the first quarter of the 2011 fiscal year, the Company had a revolving senior secured asset based credit facility (the Facility) which provided the Company with borrowing availability of $60 million. The Company did not borrow under the Facility which was terminated on March 31, 2011. Barring extraordinary developments, the Company expects to satisfy its current cash requirements for 2011, including requirements for any new stores, anticipated store closing costs, expected enhancement of information systems and anticipated current obligations, primarily with cash flow from operations and cash on hand. As such, the Company does not anticipate any need for borrowing before December 31, 2011 when the Facility would have expired by its terms. The Company expects to enter into a less expensive long-term credit facility in the near future.
At June 30, 2011, the Company had $15.0 million of restricted cash, all of which is classified as a current asset. The restricted cash serves as collateral for irrevocable standby and open letters of credit that provides financial assurance that the Company will fulfill its obligations. The cash is held in custody by the issuing bank and is restricted as to withdrawal or use. As of June 30, 2011, the Company had $8.8 million of standby and open letters of credit. The Company did not have any off-balance sheet arrangements as of June 30, 2011.
The foregoing commentary should be considered to fall within the coverage of the "Safe Harbor Statement" under the Private Securities Litigation reform Act of 1995 included in this report.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company has auction-rate-securities that contain "A" through "double C" rated debt obligations and a preferred share closed end fund that are substantially all insured. All of the Companys auction-rate securities have failed at auction as a result of illiquidity and imbalance in order flow within the market. A failed auction is not an indication of an increased credit risk or a reduction in the underlying collateral; however, parties wishing to sell securities could not do so. Based on current market
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conditions, it is not known when or if the capital markets will come back into balance to achieve successful auctions for these securities. If these auctions continue to fail, it could result in the Company holding securities beyond their next scheduled auction reset dates and will limit the liquidity of these investments. Based on the Companys expected operating cash flows, and other sources and uses of cash, the Company does not anticipate that the lack of liquidity of these investments will affect its ability to execute its current business plan. These assets have been classified as long-term in the Companys Condensed Consolidated Balance Sheets and have been recorded at their fair value.
The Company is exposed to currency exchange rate risks with respect to its inventory transactions denominated in foreign currencies, although greater than 95% of the transactions are in US dollars. Business activities in various currencies expose the Company to the risk that the eventual net dollar cash flows from transactions with foreign suppliers denominated in foreign currencies may be adversely affected by changes in currency rates. The Company manages these risks by periodically utilizing foreign exchange contracts. The Company does not enter into foreign currency transactions for trading or speculative purposes. At June 30, 2011, the Company had no forward exchange contracts outstanding.
The Company sources a significant amount of product from China and is subject to foreign currency exposure. If the Yuan is allowed to float freely against other foreign currency, a two percent change in exchange rates could have a material effect on the cost of future inventory purchases to be transacted by the Company.
Item 4. Controls and Procedures
Evaluation of disclosure controls and procedures
The Companys Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the Companys disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (the Exchange Act), as of the end of the period covered by this quarterly report, and have concluded that the Companys disclosure controls and procedures were effective and designed to ensure that all material information required to be disclosed by the Company in reports filed or submitted under the Exchange Act is (1) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms, and (2) accumulated and communicated to the Companys management, including the Companys Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosures.
Changes in internal control over financial reporting
There were no changes in the Companys internal controls over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Companys internal control over financial reporting.
Item 1. Legal Proceedings. None
Item 1A. Risk Factors. There have been no material changes during the quarterly period ended June 30, 2011 from the risk factors previously disclosed in the Companys Annual Report on Form 10-K for the year ended December 31, 2010.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. None
Item 3. Defaults Upon Senior Securities. None
Item 5. Other Information. None
Item 6. Exhibits.
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10.15 |
Employment Agreement between Kenneth Cole Productions, Inc. and Paul
Blum dated June 9, 2011.
|
||||
23.01 | Consent of Independent Appraisal Firm. | ||||
31.1 | Certification of Chief Executive Officer pursuant to Securities Exchange Act Rule 13a-14 and 15d-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | ||||
31.2 | Certification of Chief Financial Officer pursuant to Securities Exchange Act Rule 13a-14 and 15d-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | ||||
32.1 | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | ||||
32.2 | Certification of 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.CAL | XBRL Calculation Linkbase Document | ||||
101.DEF | XBRL Definition Linkbase Document | ||||
101.PRE | XBRL Presentation Linkbase Document | ||||
101.LAB | XBRL Label Linkbase Document | ||||
101.SCH | XBRL Schema Document |
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SIGNATURES
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.
Kenneth Cole Productions, Inc. | |||||
Registrant | |||||
August 5, 2011 | /s/ DAVID P. EDELMAN | ||||
David P. Edelman | |||||
Chief Financial Officer (Principal Financial and Accounting Officer) |
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