Perry Ellis Lags; Outlook Shrinks

Perry Ellis International Inc. (PERY) posted adjusted earnings per share of a penny in the second quarter of fiscal 2013, missing the Zacks Consensus Estimate of 3 cents as well as deteriorating from the year-ago earnings of 11 cents per share. On a reported basis, losses per share were 17 cents versus a gain of 11 cents earned in the year-ago quarter.

Perry Ellis' total revenue decreased 2.3% year over year in the quarter to $209.4 million which also fell short of the Zacks Consensus Estimate of $211.0 million.

During the quarter, Perry Ellis' gross profit declined 4.0% year over year to $69.3 million. Moreover, gross margin fell 60 basis points (bps) to 33.1%. Selling, general and administrative expense increased 4.3% year over year to $66.1 million owing to the expense associated with the company’s voluntary retirement program and the elimination and relocation of a third party logistics provider as well as some business.

Liquidity

At quarter end, Perry Ellis had cash and cash equivalents of $82.4 million. Total long-term liability was $226.1 million.

Guidance

For fiscal 2013, Perry Ellis expects revenue from its existing business in the range of $990 million—$1.0 billion. Adjusted earnings per share guidance have been lowered to the range of $1.75—$1.80 from the previously guided range of $1.95—$2.00. On a GAAP basis, management expects earnings per share between $1.65—$1.70 (previously guided $1.85—$1.90).

Expansion of the Callaway license agreement into new channels of distribution as well as increased promotional activities in the collection business forced the company to slash its guidance.

For the full year, management anticipates gross margin improvement in the range of 20 to 30 bps.

Our Take

Perry Ellis, the designer, distributor and licensor of a broad line of men's and women's apparel, accessories, and fragrances, remains optimistic about the new product assortment for the fall and holiday seasons especially in the Rafaella sportswear collections.

Golf and direct-to-consumer businesses, in particular, are expected to be promising in the upcoming quarter. In a faltering economy, the company is streamlining operations and discarding less productive overhead in order to realize cost savings.

Concerns for the near term include persistent underperformance in margins and promotional markdowns. Management also expects revenues to decrease in the mid-single digits in the upcoming quarter before improving in the fourth quarter.

While margins are again expected to be down in the upcoming quarter, management considers the dip as temporary and anticipates margins to recover with the new direct sales model during the spring season.

Perry Ellis currently carries a Zacks #3 Rank, which translates into a short-term Hold rating. We are also maintaining our long-term Neutral recommendation on the stock. Perry Ellis' peers include Polo Ralph Lauren Corp. (RL) and CROCS Inc. (CROX).