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.