XNAS:PERY Perry Ellis International Inc Annual Report 10-K Filing - 1/28/2012

Effective Date 1/28/2012

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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-K

 

 

(Mark One)

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended January 28, 2012

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             .

Commission File number 0-21764

 

 

Perry Ellis International, Inc.

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

Florida   59-1162998

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

3000 N.W. 107th Avenue Miami, Florida   33172
(Address of Principal Executive Offices)   (Zip Code)

(305) 592-2830

(Registrant’s telephone number, including area code)

 

 

Securities registered pursuant to Section 12(b) of the Act:

Common Stock, par value $.01 per share

(Title of each class)

Securities registered pursuant to Section 12(g) of the Act: None

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  x

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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    x  Yes    ¨  No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    ¨

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 definitions of “large accelerated filer,” “accelerated filer” and “small reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   ¨    Accelerated filer   x
Non-accelerated filer   ¨    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

The aggregate market value of the voting stock held by non-affiliates of the registrant is approximately $303,377,375 (as of July 30, 2011).

The number of shares outstanding of the registrant’s Common Stock is 15,719,767 (as of April 9, 2012).

 

 

DOCUMENTS INCORPORATED BY REFERENCE

The following documents are incorporated by reference:

Portions of the Company’s Proxy Statement for the 2012 Annual Meeting—Part III

 

 

 


Table of Contents

Table of Contents

 

          Page  
Part I   
Item 1.   

Business

     4   
Item 1A.   

Risk Factors

     20   
Item 1B.   

Unresolved Staff Comments

     26   
Item 2.   

Properties

     26   
Item 3.   

Legal Proceedings

     27   
Item 4.   

Mine Safety Disclosures

     27   
Part II   
Item 5.   

Market for Registrant’s Common Equity and Related Stockholder Matters

     27   
Item 6.   

Selected Financial Data

     31   
Item 7.   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     32   
Item 7A.   

Quantitative and Qualitative Disclosures about Market Risk

     47   
Item 8.   

Financial Statements and Supplementary Data

     48   
Item 9.   

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

     48   
Item 9A.   

Controls and Procedures

     49   
Item 9B.   

Other Information

     52   
Part III   
Item 10.   

Directors, Executive Officers and Corporate Governance

     52   
Item 11.   

Executive Compensation

     52   
Item 12.   

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

     52   
Item 13.   

Certain Relationships and Related Transactions, and Director Independence

     52   
Item 14.   

Principal Accountant Fees and Services

     53   
Part IV   
Item 15.   

Exhibits and Financial Statement Schedules

     53   
  

Signatures

     60   

 

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Unless the context otherwise requires, all references to “Perry Ellis,” the “Company,” “we,” “us” or “our” include Perry Ellis International, Inc. and its subsidiaries. References in this report to the Rafaella acquisition refer to our acquisition of this brand in January 2011. The Ben Hogan acquisition refers to our acquisition of this brand in February 2012. In March 2009 we adopted a “retail calendar” fiscal year commencing for fiscal 2010. The retail calendar fiscal year divides a quarter into a series of 4-5-4 equal weeks. Each week begins on a Sunday and ends on the corresponding Saturday. References in this report to annual financial data for Perry Ellis refer to fiscal years ended January 28, 2012, January 29, 2011 and January 30, 2010. This Form 10-K contains references to trademarks held by us and those of third parties.

General information about Perry Ellis can be found at www.pery.com. We make our annual report on Form 10-K, quarterly reports on Form 10-Q, current report on Form 8-K and amendments to these reports filed or furnished pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, available free of charge on our website, as soon as reasonably practicable after they are electronically filed with the SEC.

FORWARD-LOOKING STATEMENTS

We caution readers that this report and the portions of the proxy statement incorporated by reference into this report include “forward-looking statements” as that term is used in the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based on current expectations rather than historical facts and they are indicated by words or phrases such as “anticipate,” “believe,” “budget,” “contemplate,” “continue,” “could,” “envision,” “estimate,” “expect,” “guidance,” “indicate,” “intend,” “may,” “might,” “plan,” “possibly,” “potential,” “predict,” “probably,” “pro-forma,” “project,” “seek,” “should,” “target,” or “will” or the negative thereof or other variations thereon and similar words or phrases or comparable terminology. We have based such forward-looking statements on our current expectations, assumptions, estimates and projections. While we believe these expectations, assumptions, estimates and projections are reasonable, such forward-looking statements are only predictions and involve known and unknown risks and uncertainties, and other factors that may cause actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements, many of which are beyond our control. These and other important factors may cause our actual results, performance or achievements to differ materially from any future results, performance or achievements expressed or implied by these forward-looking statements. Some of the factors that could affect our financial performance, cause actual results to differ from our estimates, or underlie such forward-looking statements, are as set forth below and in various places in this report and in the portions of the proxy statement incorporated by reference, including under the headings Item 1 “Business,” Item 1A “Risk Factors,” and Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this report. These factors include:

 

   

general economic conditions,

 

   

a significant decrease in business from or loss of any of our major customers or programs,

 

   

anticipated and unanticipated trends and conditions in our industry, including the impact of recent or future retail and wholesale consolidation,

 

   

recent and future economic conditions, including turmoil in the financial and credit markets,

 

   

the effectiveness of our planned advertising, marketing and promotional campaigns,

 

   

our ability to contain costs,

 

   

disruptions in the supply chain,

 

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our future capital needs and our ability to obtain financing,

 

   

our ability to protect our trademarks,

 

   

our ability to integrate acquired businesses, trademarks, tradenames and licenses,

 

   

our ability to predict consumer preferences and changes in fashion trends and consumer acceptance of both new designs and newly introduced products,

 

   

the termination or non-renewal of any material license agreements to which we are a party,

 

   

changes in the costs of raw materials, labor and advertising,

 

   

our ability to carry out growth strategies including expansion in international and direct to consumer retail markets,

 

   

the level of consumer spending for apparel and other merchandise,

 

   

our ability to compete,

 

   

exposure to foreign currency risk and interest rate risk,

 

   

possible disruption in commercial activities due to terrorist activity and armed conflict, and

 

   

other factors set forth in this report and in our other Securities and Exchange Commission (“SEC”) filings.

You are cautioned that all forward-looking statements involve risks and uncertainties, detailed in our filings with the SEC. You are cautioned not to place undue reliance on these forward-looking statements, which are valid only as of the date they were made. We undertake no obligation to update or revise any forward-looking statements to reflect new information or the occurrence of unanticipated events or otherwise.

 

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PART I

Item 1. Business

Overview

We are one of the leading apparel companies in the United States. We manage a portfolio of major brands, some of which were established over 100 years ago. We design, source, market and license our products nationally and internationally at multiple price points and across all major levels of retail distribution in approximately 15,000 selling doors. Our portfolio of highly recognized brands includes the Perry Ellis® family of brands, Axis®, Tricots St. Raphael®, Jantzen®, John Henry®, Cubavera®, the Havanera Co.®, Centro®, Solero®, Chispa®, Natural Issue®, Munsingwear®, Grand Slam®, Original Penguin® by Munsingwear® (“Original Penguin”), Mondo di Marco®, Redsand®, Pro Player®, Manhattan®, Axist®, Savane®, Farah®, Gotcha®, Girl Star®, MCD®, Laundry by Shelli Segal®, C&C California®, Rafaella®, and Ben Hogan®. We also (i) license the Nike® brand for swimwear and swimwear accessories, (ii) license the Jag® brand for men’s and women’s swimwear and cover-ups, (iii) license the Callaway Golf® brand and Top-Flite® for golf apparel, (iv) license the PGA TOUR® brand, including Champions Tour®, for golf apparel, and (v) license Pierre Cardin® for men’s sportswear.

We distribute our products primarily to wholesale customers that represent all major levels of retail distribution including department stores, national and regional chain stores, mass merchants, specialty stores, sporting goods stores, the corporate wear market, e-commerce, as well as clubs and independent retailers in the United States, Canada, Mexico, the United Kingdom and Europe. Our largest customers include Kohl’s Corporation (“Kohl’s”), Macy’s, Inc. (“Macy’s”), The Marmaxx Group, Dillard’s Inc. (“Dillard’s”) and Sam’s Wholesale Club (“Sam’s”). As of March 5, 2012, we operated 40 Perry Ellis and five Original Penguin retail outlet stores located primarily in upscale retail outlet malls across the United States, United Kingdom and Puerto Rico. As of March 5, 2012 we also operated two Perry Ellis, one Cubavera and 17 Original Penguin full price retail stores located in upscale demographic markets in the United States and United Kingdom. In addition, we leverage our design, sourcing and logistics expertise by offering a limited number of private label programs to retailers. In order to maximize the worldwide exposure of our brands and generate high margin royalty income, we license our brands through three worldwide, 44 domestic, and 84 international license agreements covering over 100 countries.

In fiscal 2012, our Men’s Sportswear and Swim segment, which is comprised of men’s sportswear, swimwear and swimwear accessories, accounted for 73% of our total revenues, our Women’s Sportswear segment accounted for 17% of our total revenues, our Direct-to-Consumer segment, which is comprised of retail and e-commerce, accounted for 7% of our total revenues and our licensing segment accounted for approximately 3% of our total revenues. Finally, our U.S. based business represented approximately 92% of total revenues, while our foreign operations represented 8% for fiscal 2012.

Our licensing business is a significant contributor to our operating income. We license the brands we own to third parties for the manufacturing and marketing of various products in distribution channels and countries in which we do not distribute those brands, including men’s and women’s apparel and footwear, men’s suits, underwear, loungewear, outerwear, fragrances, eyewear and accessories. These licensing arrangements heighten the overall awareness of our brands without requiring us to make capital investments or incur additional operating expenses.

Our Competitive Strengths

We believe that our competitive strengths position us to capitalize on several trends that have affected the apparel industry in recent years. These trends include:

 

   

the consolidation of the department and chain store distribution channels into a smaller number of larger retailers,

 

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the increased dependence of retailers on reliable suppliers who have design expertise, advanced systems and technology, and the ability to quickly meet changing consumer tastes,

 

   

the continued importance of strong brands as a source of product differentiation, and

 

   

planning, sourcing, and replenishment requirements from customers versus managed inventory capabilities of vendors.

We believe that we have the following competitive strengths in our industry:

Portfolio of nationally and internationally recognized brands. We currently own or license a portfolio of over 30 brands, which enjoy high recognition within their respective consumer segments. Our brands attract a loyal following of consumers and retailers who desire high quality, well-designed fashion apparel and accessories. We have developed our premier brand, Perry Ellis, into an American sportswear lifestyle brand. Our other owned brands include well-known names such as Ben Hogan, Cubavera, the Havanera Co., Original Penguin, Rafaella, Laundry by Shelli Segal, C&C California, and Jantzen. Additionally, we license various brands including Callaway Golf, Nike, Jag, and PGA TOUR. To broaden our brands’ consumer reach into additional categories and geographies, we also license several of our owned brands to third parties. We believe our strong brand recognition supports the strength of the business by helping to define consumer preferences and drive selling space at retailers.

Diversified business model. We believe that our diversified business model allows us to maximize the reach of our brand portfolio while reducing the risk associated with any single brand, product category or point of distribution. We view our business as being diversified:

By brand: We maintain a global portfolio of over 30 highly recognized brands that appeal to fashion conscious consumers across various income levels. We design, source, market and license most of our products on a brand-by-brand basis targeting distinct consumer demographic and lifestyle profiles. For example, we market the Perry Ellis and Original Penguin brands to higher-income consumers and market the Grand Slam, John Henry and the Havanera Co. brands to middle-income consumers. We also market brands that target women through our Rafaella, Laundry by Shelli Segal and C&C California brands, as well as through our family of swimwear products, which include Jantzen, Nike, Jag and Perry Ellis.

By product: We design and market apparel and accessories in a broad range of both men’s and women’s product categories, which we believe increases the stability of our business. Our menswear offerings include career and casual sportswear and bottoms, dress shirts and pants, jeans wear, golf apparel, sweaters, sports apparel, swimwear and swim accessories, active wear, outerwear and leather accessories. Our women’s-wear offerings include dresses, sportswear, swimwear, and swim accessories. We believe that our product diversity decreases our dependence on a single product line or fashion trend and contributes substantially to our growth opportunities.

By distribution channel: We market our products across multiple levels of retail distribution, allowing us to reach a broad range of consumers domestically and internationally. We distribute our products through luxury stores, department stores, national and regional chain stores, mass merchants, specialty stores, sporting goods stores, the corporate wear market, e-commerce, as well as clubs and independent retailers. Our products are distributed through approximately 15,000 doors at some of the nation’s leading retailers, including Kohl’s, Macy’s, The Marmaxx Group, Dillard’s and Sam’s. We also distribute our products through our own retail stores, which include 40 Perry Ellis and five Original Penguin retail outlet stores and two Perry Ellis, one Cubavera and 17 Original Penguin full-price retail stores. We also operate e-commerce sites for several of our brands. Finally, we have successfully expanded product and brand distribution in the United Kingdom, Canada, Mexico and Europe, and believe additional opportunities exist for further international expansion of our brand base.

 

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The following table illustrates the current diversity of a cross section of our brands and products we produce and market and their respective distribution channels:

 

Distribution Channels

  

Sportswear

  

Bottoms/

Jeans Wear

  

Golf

  

Action Sportsbrands/

Swim

Luxury Stores

  

Original Penguin

Laundry by Shelli Segal

C&C California

   Original Penguin    Callaway Golf   

Department Stores

   Perry Ellis    Perry Ellis    Callaway Golf    Perry Ellis
  

Perry Ellis Portfolio

Savane

Cubavera

Laundry by Shelli Segal

Rafaella

  

Perry Ellis Portfolio

Savane

Store Brands

Pierre Cardin

  

PGA TOUR

Champions Tour

  

Nike Swim

Jantzen

Jag

Laundry by Shelli Segal

Chain Stores

  

Natural Issue

The Havanera Co.

Centro

Chispa

Axist

John Henry

Mondo di Marco

Pierre Cardin

  

Natural Issue

Axist

Store Brands

  

PGA TOUR

Pro Player

Grand Slam

  

Nike Swim

Jag

Redsand

Gotcha

Mass Merchants

   Solero    Store Brands   

Top-Flite

Store Brands

  

Corporate/Resort

   Cubavera      

Callaway Golf

PGA TOUR

Munsingwear

  

Specialty Stores

  

C&C California

Laundry by Shelli Segal

Original Penguin

        

Jantzen

Nike Swim

Jag

International (1)

  

Perry Ellis

Original Penguin

Manhattan

Farah

Laundry by Shelli Segal

  

Perry Ellis

Original Penguin

Farah

     

Jantzen

Nike

Direct Retail

  

Original Penguin

Perry Ellis

Cubavera

C&C California

  

Original Penguin

Perry Ellis

Cubavera

      Original Penguin

 

(1) This channel includes Company operated retail stores, e-commerce and concession locations

Strong relationships with our retailers. We believe that our established relationships with retailers allow us to maximize the selling space dedicated to our products, monitor our brand presentation and merchandising selection, and proactively introduce new brands and products. Because of our quality brands and products, dedication to customer service, design expertise and sourcing capabilities, we have developed and maintained long-standing relationships with our largest customers.

Solid licensing capabilities and relationships. We license many of the brands we own, and, as a result, have gained significant experience in identifying potential licensing opportunities. We have established relationships with many licensees and believe these relationships provide opportunities to grow our revenues and earnings while minimizing capital expenditures and execution risk. We believe that our broad portfolio of brands also appeals to licensees because our brands (i) are solidly positioned in retail outlets at all major levels of retail distribution, (ii) have increased our exposure nationally and internationally and (iii) give licensees the opportunity to sell their products through different channels distribution. For example, a manufacturer of women’s leather bags

 

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might license the Laundry by Shelli Segal brand to enter the luxury store channel. By licensing our owned brands, we offer consumers a complete product assortment by brand. We also coordinate our marketing efforts with licensees, thereby maximizing exposure for our brands and our return on investment.

Sophisticated global low-cost sourcing capabilities. We have sourced our products globally for over 45 years and employ sophisticated logistics and supply chain management systems to maintain maximum flexibility. Our network of worldwide company owned sourcing offices and some agents enables us to meet our customers’ needs in an efficient and high quality manner without relying on any one vendor, factory, or country. In fiscal 2012, based on the total units, we sourced our products from Asia (82%), the Americas (6%) and the Middle East (12%). We maintain a staff of over 300 experienced sourcing professionals in six offices in China (including two in Hong Kong), as well as in the United States, South Korea, Taiwan, Bangladesh, Indonesia and Vietnam. Our sourcing offices closely monitor our suppliers and provide strict quality assurance analyses that allow us to consistently maintain our high quality standard for our customers. We have a compliance department that works closely with our quality assurance staff to ensure that our sourcing partners comply with Company-mandated and country-specific labor and employment regulations. We believe that sourcing our products overseas allows us to manage our inventories more effectively while avoiding capital investments in production facilities. Because of our sourcing experience, capabilities and relationships, we believe that we are well positioned to take advantage of the changing textile and apparel quota environment.

Design expertise and advanced technology. We maintain a staff of designers, merchandisers and artists who are supported by a staff of design professionals, including assistant designers, technical designers, graphic artists and production assistants. Our in-house design staff designs substantially all of our products using advanced computer-aided design technology that minimizes the time-intensive and costly production of sewn prototypes prior to customer approval. In addition, this technology provides our customers with products that have been custom designed for their specific needs and meet current fashion trends. We employ advanced fabric and design technologies to ensure a proper fit and outstanding performance when we create our women’s and men’s golf and swimwear. We regularly upgrade our computer technology to enhance our design capabilities, facilitate communication with our global suppliers and customers on a real-time basis, react faster to new product developments by competitors and meet changes in customer needs.

We use an Oracle Retail system, which enhances our sales planners’ ability to manage and monitor our retail customers’ inventory at the SKU level. This system helps maximize the sales and margins of our products by increasing inventory turns for the retailer, which in turn reduces our product returns and markdowns and increases our profitability. We use both PerrySolutions in-house software and Oracle Retail during the assortment planning process to allocate the correct quantities for the initial rollout of product at retail.

Proven ability to integrate acquisitions. We have been successful in selectively acquiring, managing, developing and positioning more than 30 highly recognized brands within our business, including Munsingwear (1996), Perry Ellis (1999), John Henry (1999), Manhattan (1999), Jantzen (2002), the brands owned by Perry Ellis Menswear, LLC and Redsand (2003), Farah and Savane (2005), the action sports Gotcha, Girl Star and MCD brands (2005/2006), the women’s contemporary brands, Laundry by Shelli Segal and C&C California (2008), Rafaella (2011) and most recently Anchor Blue (2011) and Ben Hogan (2012).

As part of an extensive integration process for each brand, we have:

 

   

improved the responsiveness to market trends by applying our design and sourcing expertise,

 

   

communicated positioning of our new brands through various wide-ranging marketing programs,

 

   

solidified our management team to design, market and license brands,

 

   

repositioned the brands into different distribution channels to address the needs in those channels,

 

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renegotiated existing licensing agreements and sought new licensing opportunities in new segments and markets, and

 

   

extended our sourcing and distribution capabilities to the products to include international wholesale and retail distribution.

Experienced management team. Our senior management team averages more than 30 years in the apparel industry and has extensive experience in growing and rejuvenating brands, structuring licensing agreements, and building strong relationships with global suppliers and retailers. George Feldenkreis, our chairman and chief executive officer, and Oscar Feldenkreis, our vice chairman, president and chief operating officer, have employment agreements through January 31, 2013. Additionally, we have an established and highly experienced team of senior managers who support our business.

Our Business Strategy

Our strategy is to continue to pursue our three-dimensional approach to growth and profitability by developing and enhancing our portfolio of brands, increasing the scope and diversity of our product offerings and broadening distribution for our brands. The key elements of our business strategy include the following:

Continue to strengthen the competitive position and recognition of our brands. We intend to continue enhancing the recognition of our brands by aggressively marketing them to both consumers and retailers. We manage each brand individually, developing a distinct brand and marketing strategy for every product category and distribution channel. We participate in cooperative advertising in print and broadcast media, as well as market directly to consumers through social media, billboards, event and celebrity sponsorships, special event advertisements, online through our e-commerce platform and viral marketing initiatives, and advertisements in selected periodicals. In addition, we continue to have a strong presence at trade shows, such as “MRket.” in Las Vegas, Market Week in New York, PGA in Orlando, Bread and Butter in Europe and golf, surf and swim shows and events throughout the world. Licensing our brands to third parties also enhances brand recognition by providing increased customer exposure domestically and internationally, as well as opportunities for future product extensions.

Continue to diversify our product line. We intend to continue to expand the range of our product lines, thereby capitalizing on the name recognition, popularity, and target customer segmentation of our major brands. For example, our Jantzen acquisition positioned us within the swim and swim accessories markets, and through the Nike swim and Jag brands into the sports distribution and swim department store channels. We have used the expertise developed through Jantzen, coupled with the power of the Perry Ellis and Original Penguin brands, to successfully expand our swim business. Our expertise in golf lifestyle has allowed us to diversify our mens sportswear business to provide product categories under nationally recognized golf brands. The recent acquisition of the Ben Hogan brand further exemplifies our ability to expand our men’s golf product business. With the acquisitions of the Rafaella, Laundry by Shelli Segal and C&C California brands, we have significantly strengthened our position in women’s apparel in the United States. Our recent Rafaella acquisition provides us with the potential for product extensions and synergies throughout the Laundry by Shelli Segal, C&C California and Perry Ellis brands. We also see opportunity for the production of swimwear lines for these brands and the licensing of accessories, footwear and fragrances categories. Finally, we will seek further expansion of our women’s-wear offerings through a continued launch of e-commerce sites.

Increase penetration in each channel. We will continue to selectively pursue new ways to increase our penetration of existing channels of distribution for our products, focusing on maintaining the integrity of our products and reinforcing our image at existing and new retail stores. We will seek to introduce our products to geographic areas and consumer sectors that are presently less familiar with our products. We will also seek to expand our business with our existing customers by offering them products that are compelling and different from those in the marketplace and by capitalizing on our relationships with them by offering them more of our products.

 

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Adapt to our continually changing marketplace. We will continue to make the necessary investments and implement strategies to meet the growing needs of our customers on a timely basis in the ever-changing apparel industry. We are currently focusing on expanding our business in the following areas:

 

   

We have successfully focused on Hispanics, the largest minority group in the United States, by developing the Cubavera, the Havanera Co., Chispa, Centro and Solero brands. These brands specifically target the Hispanic market and consumers that embrace the Hispanic lifestyle brands. We also develop and sell to retailers Hispanic-inspired sportswear under private label brands. We look to continue expansion of this product category.

 

   

We re-introduced the Original Penguin brand, to target both Generation X and Generation Y, who are suburban upper-middle class. The product line is primarily sold at upscale department and upper tier specialty stores, as well as in 17 of our own upscale retail locations. We believe this brand has continued growth opportunities as we expand our product categories into premium denim and women’s sportswear and dresses, as well as expanding our distribution to include an increasing number of direct retail store locations.

 

   

With the acquisition of the Laundry by Shelli Segal, C&C California and the Rafaella brands, we significantly strengthened our position in women’s apparel in the United States. The Rafaella acquisition provides us with the potential for product extensions and synergies throughout the Laundry by Shelli Segal, C&C California and Perry Ellis Brands. We see opportunity for the production of swimwear lines for these brands. We also see additional potential by licensing out accessories, footwear and fragrances, as evidenced by the recent license of the Laundry by Shelli Segal fragrance.

 

   

With the acquisition of the Gotcha, Girl Star and MCD brands, coupled with our Redsand brand, we will continue to pursue ways to increase our penetration of the action sports brand category.

 

   

We are a top producer of golf lifestyle products with multiple brands including Callaway Golf, PGA TOUR, Grand Slam, and Champions Tour, across multiple distribution channels and look for further expansion in this area. We added Callaway Golf and Top-Flite to our portfolio of golf, during fiscal 2010, which allows us to leverage our design and sourcing capabilities as we distribute for Callaway Golf company. In addition, in early fiscal 2013 we concluded the purchase of the Ben Hogan trademark further expanding our portfolio of golf lifestyle brands.

 

   

We expect to increase the presence of our brands in Europe by leveraging our United Kingdom market position with our Farah brand bottoms. We successfully introduced the Original Penguin brand on a pan European basis in fiscal 2007. We look to generate further expansion of Original Penguin and of our other brands internationally.

 

   

We are focused on several initiatives to increase our direct to consumer sales, including further expansion of our full-priced retail, our outlet stores and our continued launch of e-commerce web sites.

Expand our licensing opportunities. Licensing our brands to third parties enhances brand recognition by providing increased customer exposure domestically and internationally, as well as opportunities for future product extensions. We intend to continue to license our brands to existing and new licensees as profitable opportunities arise and expand our licensing activities in home, women’s-wear, sportswear, and fragrances across all geographies. We will continue to provide our licensing partners with strong brands, design expertise and innovative marketing strategies. In addition to the revenues and brand awareness that licensing provides us, we also believe that licensing our brands benefits us by providing significant high-margin operating income.

 

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Pursue strategic acquisitions and opportunities that leverage and enhance our business platforms. We intend to continue our strategy of making selective acquisitions to expand our portfolio of brands and add new product categories. We intend to pursue acquisition opportunities in a disciplined and opportunistic manner and focus on products or categories that have high consumer awareness and are difficult to duplicate from a technical or logistical standpoint. We will also continue to internally develop new brands and logical extensions of existing brands as opportunities in the marketplace arise. Since our initial public offering in 1993, we have acquired, or obtained licenses for, many brands, including Munsingwear, Perry Ellis, John Henry, Manhattan, Jantzen, Jag, Nike, Mondo di Marco, Axis, Tricots St. Raphael, Redsand, Pro Player, PGA TOUR, Savane, Farah, Champions Tour, Gotcha, Girl Star, MCD, Laundry by Shelli Segal, C&C California, Callaway Golf, Top-Flite, Pierre Cardin, Rafaella, and most recently Ben Hogan. We believe that our history of selectively acquiring under-marketed or under-performing brands and incorporating them into our efficient infrastructure generates a superior return on investment for us.

Recent Developments

On February 16, 2012, we completed the acquisition of the world-wide intellectual property rights of the Ben Hogan family of brands from Callaway Golf Company.

On March 2, 2011, we entered into underwriting agreements with Merrill Lynch, Pierce, Fenner & Smith Incorporated and Deutsche Bank Securities Inc., as representatives of the underwriters that are parties thereto (the “Underwriting Agreements”) in connection with common stock and senior subordinated offerings.

Pursuant to the Underwriting Agreement relating to the common stock offering, we agreed to sell, and the underwriters agreed to purchase, 2.0 million shares of our common stock at a price to the public of $28.00 per share and an underwriting discount of $1.40 per share, resulting in net proceeds to us before offering expenses of $26.60 per share, or $53.2 million in aggregate net proceeds. We used the net proceeds from the common stock offering to repay a portion of the amounts outstanding under our senior credit facility.

Pursuant to the Underwriting Agreement relating to the senior subordinated notes offering, we agreed to sell, and the underwriters agreed to purchase, $150 million in aggregate principal amount of our 7 7/8% Senior Subordinated Notes Due 2019 at a price to the public of 100.00% of par and an underwriting discount of 2.0%, resulting in aggregate net proceeds to us of $146.5 million. We used the net proceeds of the senior subordinated notes offering first to redeem our outstanding 8 7/8% Senior Subordinated Notes Due 2013 at a redemption price of 101.4792% of the outstanding principal amount, plus accrued and unpaid interest, and the remaining net proceeds were used to repay a portion of the amounts outstanding under our senior credit facility.

On January 28, 2011, we completed the acquisition of substantially all of the assets of Rafaella Apparel Group, Inc., an entity controlled by affiliates of Cerberus Capital Management, L.P. Rafaella is a leading designer, sourcer, marketer and distributor of a full line of women’s sportswear. The consideration paid by us totaled $75 million in cash and a warrant to purchase 106,565 shares of our common stock. This purchase included Rafaella’s inventory, receivables, purchase orders and intellectual property. We assumed certain liabilities of Rafaella, including, among other things, certain accounts payable, accrued liabilities and certain letters of credit. We funded the acquisition through our senior credit facility.

The acquisition of the Rafaella brands provided us with the opportunity to extend product offerings to additional retail customers. We also see the opportunity to build sportswear collections under our existing brands such as Laundry by Shelli Segal, C&C California and Perry Ellis. The Rafaella brands target a value-conscious, yet fashion-minded, consumer and are distributed through several major department stores.

In March 2009, we entered into a licensing agreement with Callaway Golf Company to design, manufacture and distribute Callaway golf and sportswear apparel in North America. Subsequently, we amended the licensing agreement to include Top-Flite.

 

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Brands

In fiscal 2012, approximately 85% of our net sales were from branded label sales compared to 82% in fiscal 2011. We currently own and license nationally and internationally over 30 recognized brands and the products are sourced for and sold throughout all major levels of retail distribution. Our owned brands include the Perry Ellis family of brands, Axis, Tricots St. Raphael, Jantzen, John Henry, Cubavera, the Havanera Co., Chispa, Centro, Solero, Natural Issue, Munsingwear, Grand Slam, Original Penguin by Munsingwear, Mondo di Marco, Redsand, Pro Player, Manhattan, Axist, Savane, Farah, Gotcha, Girl Star, MCD, Laundry by Shelli Segal, C&C California, Rafaella, and Ben Hogan. We also distribute the Nike, Jag, Champions Tour, PGA TOUR, Callaway Golf, Top-Flite and Pierre Cardin brands under license arrangements.

We license our premier brand, Perry Ellis, and many of our other brands for products in distribution channels in which we do not sell directly to retailers. In addition, we license our brands internationally. Our depth of brand selection enables us to target consumers across a wide range of ages, incomes and lifestyles, reduces our reliance on any single distribution channel, customer or demographic group, and minimizes competition among brands.

Perry Ellis. The Perry Ellis, Perry Ellis Portfolio and Perry Ellis America brands together propose a lifestyle inspired by a witty vision of American Sportswear updated to address current trends, and does so with a strong focus on quality, value, comfort and innovation. The Perry Ellis lifestyle appeals primarily to higher-income, fashion conscious, professional men. The Perry Ellis branded products are sold in upscale and major department stores, in both domestic and international markets, as well as online at www.perryellis.com and at branded stores. We also license the Perry Ellis brand to third parties for a wide variety of apparel and non-apparel products.

Axist. The Axist brand offers trend right fashion and style for today’s discerning male consumer and is exclusively sold at Kohl’s.

Axis. The look and feel of Axis is inspired by the casual yet spirited energy of the West Coast lifestyle. The collection’s ‘modern-yet-casual’ wovens, knits, sweaters, blazers and bottoms are characterized by exceptionally soft fabrics and garment details which utilize interesting aging and washing techniques. Carried in luxury and regional department stores around the country, the label was established in the 1980s and has continuously defined casual “trend right” sportswear for the upper-tier market.

C&C California. Based in Los Angeles, C&C California was founded in 2003, creating vintage-inspired tees from ultra-soft cotton in a wide range of exuberant colors. C&C California designs and markets a sportswear collection for women, including woven tops, bottoms and premium cashmere sweaters. With a cult celebrity fan base the label is known for its soft-handed, quality fabrics. C&C California creates sophisticated, chic, California inspired apparel with an emphasis on refined sexiness, comfort and subtle detailing in vibrant colors, targeting the fashion conscious customer, regardless of age. C&C California is distributed through specialty retailers, luxury department stores and its own website www.candccalifornia.com.

Laundry by Shelli Segal. Laundry by Shelli Segal, founded in 1988, has been a leader in the contemporary dress market for over 20 years. The label is a reflection of the “LA Girl” – feminine and contemporary with a fun and flirty attitude, always demanding the next fashion statement. Laundry by Shelli Segal offers must-have clothes for a 24/7 lifestyle, from work to play, bringing luxury and creating fashion forward designs for the consumer in the know. Sought after by fashionistas and Hollywood A-listers alike, the label attracts multiple celebrities. The brand is available in premium department stores and luxury specialty retailers, as well as internationally. Laundry by Design (“LBD”), the little sister of Laundry by Shelli Segal, is the collection inspired by the next generation girl who loves to shop and stand out in the crowd. LBD is value priced and answers the need for the more youthful, carefree girl that wants the of-the-moment trends.

Rafaella. Founded in 1982, Rafaella focuses on understanding the needs of the modern woman who leads an on-the-go lifestyle. The brand’s continued success is a result of combining luxury fabrics and great style with an impeccable fit, and is how the brand eventually became famous for “The Perfect Fitting Pant”. The brand is currently distributed through better department stores.

 

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Original Penguin. We re-introduced the Original Penguin brand with its signature penguin icon logo in fiscal 2003, which is a lifestyle product for the Generation X and Y men in the urban and suburban upper-middle class. The Original Penguin lifestyle re-defines the terms geek-chic and eccentric preppy with a strong focus on Americana and vintage inspired looks. The line offers a complete array of products updating the looks that its targeted consumers’ fathers loved to wear. The product line is sold worldwide at upscale department and upper tier specialty stores and includes apparel, shoes and accessory items. The brand is also sold through 18 stand-alone stores in the USA and several international flagships in Great Britain, Argentina, Chile and the Philippines. It is also sold online at www.originalpenguin.com.

Jantzen. The Jantzen brand signifies leadership in style, innovation and fashion. For over 100 years, Jantzen has fused chic global aesthetics with iconic and authentic style. The brand’s signature red diving girl logo is one of the most recognized icons today. Timeless glamour combined with our modern day approach to marketing will continue to elevate the brand. The collection is sold in upscale, specialty and major department stores.

Cubavera, the Havanera Co, Chispa, Centro, and Solero. Our Hispanic heritage brands appeal to a multicultural consumer. The collections are designed with cross generational and crossover appeal while embracing the Hispanic lifestyle. Cubavera is currently sold in major department stores as well as specialty stores around the country, while the Havanera Co., Chispa, Centro, and Solero brands are sold through national chain stores. Cubavera is also sold in one stand-alone retail store and on line at www.cubavera.com.

Grand Slam. Grand Slam is America’s golf heritage brand. In 1951, Grand Slam introduced the world famous golf shirt, which allowed for a full and even swing. Today, this heritage is brought to life through a performance golf line that reflects a classic golf lifestyle. The Grand Slam brand is sold at Kohl’s.

Ben Hogan. Ben Hogan, “The Hawk,” is one of the legendary giants of golf history with over 69 PGA Tour victories and 9 major championships. Following his most successful season, Hogan started his golf club company in the fall of 1953 in Fort Worth, TX. Today, the brand name remains renowned among players and fans around the world.

Savane. The Savane brand is an established brand with a dynamic history of being a leader in delivering product newness and performance innovations in men’s bottoms. The Savane collection offers an array of styles, silhouettes and fabrications for every wearing occasion, and can be found in major department stores and specialty retailers.

Farah. Farah was born in the 1920s in El Paso, Texas, and became a cult classic in the United Kingdom in the 1970s. The brand has recently been resurrected to capture the interest of young, fashion-conscious men through innovative marketing and sportswear which draws inspiration from Farah design archives. Meanwhile, a line of Farah brand bottoms appealing to comfort- and value-minded men currently holds a large market share position in the U.K. Its products are widely distributed in premium and better department stores, specialty stores, and discount club markets.

John Henry. John Henry offers a dress casual collection perfect for “9 to 9 dressing” with an updated attitude while offering quality and value. The brand is available at national and regional stores.

Gotcha. Launched in 1978 from a Laguna Beach, California garage, Gotcha transformed the surf market through its incredible product, advertising, events and athletes. Gotcha celebrated its 30th anniversary as an action sports leader in 2008. Marketed as an accessible California youth lifestyle brand and widely distributed to mid-tier and action sports accounts, Gotcha enjoys a globally recognized icon.

 

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Redsand. Rooted in the coastal lifestyle of Southern California, the independent spirit of this brand is influenced by a passion for surf, travel, music, and art. Featuring an organic sensibility, creative details and a timeless look, Redsand is designed to inspire self-expression. The brand is sold at regional department stores.

Pro Player. Pro Player is an active sports brand with unisex and cross-generational appeal. The brand is committed to innovative design and quality fabrics, and appeals to health conscious individuals who enjoy a variety of indoor and outdoor sporting activities. The brand is sold at national and regional chain and sporting goods stores.

MCD. MCD delivers authentic California street wear design to progressive youth consumers, focusing on action sports specialty market.

Manhattan. The Manhattan brand’s dress casual apparel features an accessible price point and is sold primarily to upscale specialty stores internationally.

Tricots St. Raphael. Throughout 30 years, Tricots St. Raphael has built a reputation of luxury and sophistication. Impeccably designed sweaters and knits provide discerning men with distinctive patterns and a rich harmony of colors to outfit their refined lifestyle. Sportswear and sweaters are primarily targeted to specialty stores.

Mondo di Marco. The Mondo di Marco collection represents the essence of its Italian heritage with a modern sportswear approach and appeals to status-driven men. The brand is primarily targeted to department stores and national chain stores.

PGA TOUR and Champions Tour. The PGA TOUR features the game’s biggest names and most competitive players in the world. The official season is covered in virtually every major market in North America with hundreds of thousands of on-site fans and millions of television viewers worldwide. The brand is sold to mid-tier department stores and sporting goods stores. Our agreement with the PGA TOUR also includes the rights to sell apparel under the Champions Tour label. The Champions Tour showcases the most accomplished and revered players in golf. Formerly called the Senior PGA TOUR, the Champions Tour has been labeled the most successful senior sports venture in history. Champions Tour apparel is sold in major department and national chain stores, as well as in the off-course golf channel. Products under both the PGA TOUR and the Champions Tour label include golf shirts, outerwear, sweaters, pants and shorts. We are the exclusive U.S. men’s apparel licensee for the PGA TOUR and Champions Tour brands for department and chain store channels of distribution. This license was originally acquired in 2004 and has been extended through 2012. It is currently under negotiation.

Nike. We are the swimwear licensee in the USA, Canada and Mexico for Nike, the world’s leading sports and fitness company, to design, market and distribute men’s, women’s and children’s competitive and active swimwear, as well as swim-related apparel and accessories. Nike swim products are sold through team dealers, sporting goods, better specialty and department stores. The agreement was renewed and runs through 2014.

Jag. We acquired the license for Jag in 2006. This brand has been a major player in the swimwear arena for the past two decades. Jag swimwear is intended for an active woman seeking functionality and style from her swimwear. It is sold in major department stores, national chains and specialty stores. The current agreement runs through June 2014.

Callaway Golf. We became the official apparel licensee of Callaway Golf Company in March 2009. We have licensed the use of the Callaway Golf trademark to design, source and sell Callaway Golf brand apparel in North America and Mexico. The Callaway Golf apparel men’s and women’s collection and sport range includes classic and fashion lines featuring knit and woven shirts, pullovers, jackets, sweaters, vests, pants, shorts, headwear and accessories. The collection range designs focus on sophisticated styling using luxury fabrics while the sport range designs aim to appeal to the active consumer. The agreement runs through December 2014 with an option for an extension until 2019.

 

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Pierre Cardin. We became the licensee for Pierre Cardin in fiscal 2010 for the following categories in the United States, Puerto Rico and the U.S. Virgin Islands: outerwear, warm up suits, knits, sweaters, casual bottoms and denim. One of the world’s iconic fashion brands, Pierre Cardin celebrated its 60th anniversary in 2010, and is still one of the most recognized brand names in the industry. Known for its avant-garde styling and futuristic design, the brand is a fusion of French savoir-faire and New York metropolitan style. Color, patterns and design details give it a modern edge that is targeted to a cross-generational man. Carried in mid-tier department stores, the label offers easy-care fashion at accessible prices. The agreement terminates in 2012.

Private Label. In addition to our sales of branded products, we sell products to retailers for sale under the labels of their own store lines. We sell private label products to Kohl’s, Dillard’s, J.C. Penney, Sears, BJ’s Wholesale Club, and Stein Mart, Inc. Private label sales generally yield lower gross margins than sales of comparable branded products. Private label sales accounted for approximately 15% and 18% of our net sales during fiscal 2012 and 2011, respectively. The majority of our fiscal 2012 and 2011 private label sales related to our bottoms product category, which utilizes our production and replenishment expertise.

Products and Product Design

We offer a broad line of high quality men’s career and casual sportswear, dress shirts and pants, jeans wear, golf apparel, sweaters, sports apparel, outerwear, swimwear and swim accessories, active wear and leather accessories. Our women’s wear offerings include dresses, casual sportswear, swimwear and swim accessories. Substantially all of our products are designed by our in-house staff utilizing our advanced computer-aided design technology. This technology enables us to produce computer-generated simulated samples that display how a particular style will look in a given color and fabric before it is actually produced. These samples can be printed on paper or directly onto fabric to accurately present the colors and patterns to a potential customer. In addition, we can quickly alter the simulated sample in response to our customers’ needs, such as change of color, print layout, collar style and trimming, pocket details and/or placket treatments. The use of computer-aided design technology minimizes the time-consuming and costly need to produce actual sewn samples prior to retailer approval, allows us to create custom-designed products meeting the specific needs of customers and reduces a product’s time to market, from conception to the delivery of the product to customers.

In designing our apparel products, we seek to promote consumer appeal by combining functional, colorful and high quality fabrics with creative designs and graphics. Styles, color schemes and fabrics are also selected to encourage consumers to coordinate outfits and form collections, thereby encouraging multiple purchases. Our designers stay abreast of the latest design trends, fabrics, colors, styles and consumer preferences by attending trade shows, periodically conducting market research in Europe, Asia and the United States and using outside consultants. Our purchasing department also seeks to improve the quality of our fabrics by staying informed about the latest trends in fabric all over the world. In addition, we actively monitor the retail sales of our products to determine changes in consumer trends.

In accordance with standard industry practices for licensed products, we have the right to approve the concepts and designs of all products produced and distributed by our licensees.

Our products include:

Men’s Tops. We offer a broad line of sport shirts, dress shirts, sweaters, fleece, outerwear and jackets. This includes cotton and cotton-blend printed, yarn-dyed and solid knit shirts, cotton woven shirts, silk, cotton and rayon printed button front sport shirts, linen sport shirts, golf shirts, and embroidered knits and woven shirts. Our shirt line also includes dress shirts, dress casual shirts, brushed twill shirts, jacquard knits and yarn-dyed flannels. Additionally, we are one of the leading distributors of guayabera-style shirts in the United States. We market shirts under a number of our own brands as well as the private labels of our retail customers. Our tops are

 

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produced in a wide range of men’s sizes, including sizes for the big and tall men’s market. Sales of tops accounted for approximately 34%, 44% and 42% of our net sales during fiscal 2012, 2011, and 2010, respectively.

Men’s Bottoms. Our bottoms line includes a variety of styles of wool, wool-blend, linen and polyester/rayon dress pants, casual pants in cotton and polyester/cotton, and linen/cotton walking shorts. We market our bottoms as single items or as a collection to complement our shirt lines. Sales of bottoms accounted for approximately 32%, 38% and 39% of our net sales during fiscal 2012, 2011, and 2010, respectively.

Swimwear. Our swimwear line includes women’s, men’s and junior’s swimwear and accessories. Sales of swimwear and accessories accounted for approximately 9%, 10% and 11% of net sales during fiscal 2012, 2011 and 2010, respectively.

Women’s Sportswear, Dress and Contemporary. Rafaella, Laundry by Shelli Segal and C&C California have increased our distribution of women’s contemporary products, both in the dress and sportswear product category. During fiscal 2012, 2011 and 2010, sales in this product category represented approximately 19%, 3% and 3% of net sales, respectively.

Accessories. We also offer accessories under our existing brands, as well as private label. The majority of the accessories we sell are leather accessories. Accessories accounted for approximately 6%, 5% and 5% of net sales during each of fiscal 2012, 2011 and 2010, respectively.

Licensing Operations

We license the brands we own to third parties for various product categories in distribution channels and countries where we do not distribute our brands. Licensing enhances the images of our brands by widening the range, product offerings and distribution of products sold under our brands without requiring us to make capital investments or incur additional operating expenses. As a result of this strategy, we have gained experience in identifying potential licensing opportunities and have established relationships with many licensees. Our licensing operation is also a significant contributor to our operating income.

As of January 28, 2012, we were the licensor in 131 license agreements, three worldwide, 44 domestic and 84 international, for various products including footwear, men’s suits, sportswear, dress shirts and bottoms, underwear, loungewear, outerwear, active wear, neckwear, fragrances, eyewear, accessories and home. Wholesale sales of licensed products by our licensees were approximately $503 million, $530 million and $500 million in fiscal 2012, 2011, and 2010, respectively. We received royalties from these sales of approximately $25.0 million, $26.4 million and $24.9 million in fiscal 2012, 2011, and 2010, respectively. We believe that our long-term licensing opportunities will continue to grow domestically and internationally. Periodically, we have reacquired licenses which fit into our overall strategy, such as dress shirts and small leather goods in late fiscal 2011 and fiscal 2012, respectively. See our Consolidated Financial Statements and the related notes in this report for further information.

Although the Perry Ellis brand has international recognition, we still perceive the brand to be under-penetrated in international markets such as Europe, Latin America and Asia. We are actively attempting to obtain licensees for the Perry Ellis brand in international markets. We believe that our brand and licensing experience will enable us to capitalize on these international opportunities and that our operations in the United Kingdom will assist us in this endeavor. In addition, we believe that the Jantzen brand’s history of over a century will allow us to take advantage of many domestic and international licensing opportunities.

In the contemporary market, we have been successful with licensing our Original Penguin brand, both domestically and internationally, in categories such as footwear, fragrance, eyewear, hats, watches and neckwear. We also believe the addition of Laundry by Shelli Segal and C&C California, and most recently Rafaella, provides multiple licensing opportunities such as accessories, footwear and fragrance.

 

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To maintain a brand’s image, we closely monitor our licensees and approve all licensed products. In evaluating a prospective licensee, we consider the candidate’s experience, financial stability, manufacturing performance and marketing ability. We also evaluate the marketability and compatibility of the proposed products with our other products. We regularly monitor product design, development, merchandising and marketing of licensees, and schedule meetings throughout the year with licensees to ensure quality, uniformity and consistency with our products. We also give our licensees a view of our products and fashion collections and our expectations of where its products should be positioned in the marketplace. In addition to approving, in advance, all of our licensees’ products, we also approve their advertising, promotional and packaging materials.

As part of our licensing strategy, we work with our licensees to further enhance the development, image, and sales of their products. We offer licensees marketing support, and our relationships with retailers help the licensees generate higher revenues.

Our license agreements generally extend for a period of three to five years with options to renew prior to expiration for an additional multi-year period based upon a licensee meeting certain performance criteria. The typical agreement requires that the licensee pay us the greater of a royalty based on a percentage of the licensee’s net sales of the licensed products or a guaranteed minimum royalty that typically increases over the term of the agreement. Generally, licensees are required to contribute to us additional monies for advertising and promotion of the licensed products in their covered territory.

Marketing, Distribution and Customers

We market our apparel products to customers principally through the direct efforts of our in-house sales staff, independent commissioned sales representatives who work exclusively for us, and other non-exclusive independent commissioned sales representatives who generally market other product lines as well as ours. We also attend major industry trade shows and “market weeks” in the apparel industry and trade shows in our swimwear, golf, and corporate businesses.

We operate 40 Perry Ellis and five Original Penguin retail outlet stores, two Perry Ellis, one Cubavera retail store and 17 Original Penguin retail stores. We also have e-commerce web sites for our Perry Ellis, Cubavera, Original Penguin, Rafaella, and C&C California brands.

We believe that customer service is a key factor in successfully marketing our apparel products. We coordinate efforts with customers to develop products meeting their specific needs using our design expertise and computer-aided design technology. Utilizing our sourcing capabilities, we strive to produce and deliver products to our customers on a timely basis.

Our in-house sales staff is responsible for customer follow-up and support, including monitoring prompt order fulfillment and timely delivery. We utilize EDI and the Internet for certain customers in order to provide advance-shipping notices, process orders and conduct billing operations. In addition, certain customers use the EDI system to communicate their weekly inventory requirements per store to us. We then fill these orders either by shipping directly to the individual stores or by sending shipments, individually packaged and bar coded by store, to a centralized customer distribution center.

We use PerrySolutions, our software system that enables our sales planners to manage our retail customers’ inventory, at the SKU level. This system helps maximize the sales and margins of our products by increasing inventory turns for the retailer, which in turn reduces our product returns and markdowns and increases our profitability. We also use demographic mapping data software that helps us develop specific micro-market plans for our customers and provide them with enhanced returns on our various product lines.

We invested in the Oracle Retail suite of products with the goal of reducing markdowns, increasing inventory turns and increasing revenues while automating the process. The different modules allow us to monitor our customers’ product by store and quickly react to changes in consumer behavior. The suite also includes best

 

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of breed store inventory and point of sales software, which allows us to keep just in time inventory at our retail stores. This investment shows our commitment to understanding our consumer in order to strengthen our brands as well as our effort to support the continued expansion of our direct retail businesses. Additionally we invested in Trade Management Oracle Financials software to quickly and positively resolve customer claims, while tracking employee accountability.

We sell merchandise to a broad spectrum of retailers, including national and regional chain, upscale department, mass merchant and specialty stores. Our largest customers include Kohl’s, Macy’s, Dillard’s, Sam’s, and Marmaxx. We have developed and maintained long-standing relationships with these customers. We also sell merchandise to corporate wear distributors.

Net sales to our five largest customers accounted for approximately 49%, 50% and 53% of net sales in fiscal 2012, 2011, and 2010, respectively. For fiscal 2012, three customers accounted for over 10% of net sales; Kohl’s, Marmaxx and Macy’s accounted for approximately 16%, 10% and 10% of net sales, respectively. For fiscal 2011, two customers accounted for over 10% of net sales; Kohl’s and Macy’s accounted for approximately 19% and 11% of net sales, respectively. For fiscal 2010, two customers accounted for over 10% of net sales; Kohl’s and Macy’s accounted for approximately 20%, and 11% of net sales, respectively.

Advertising and Promotions

We advertise to customers through print advertisements in a variety of consumer and trade magazines and newspapers and through outdoor advertising such as billboards strategically placed to be viewed by consumers. In order to promote our men’s sportswear at the retail level, we participate in cooperative advertising in print and broadcast media, which features our products in our customers’ advertisements. The cost of this cooperative advertising is shared with our customers. We also conduct various in-store marketing activities with our customers, such as retail events and promotions, the costs of which are shared by our customers. These events and promotions are in great part orchestrated to coincide with high volume shopping times such as holidays (Christmas and Thanksgiving) and Father’s Day. In addition to event promotion, we place perennial displays and signs of our products in retail establishments.

We use direct consumer advertising in select markets featuring the Perry Ellis, Axist, Cubavera, Jantzen, Rafaella, Savane and Original Penguin brand names through the placement of highly visible billboards, sponsorships and special event advertising. We also maintain informational websites featuring our brands. We create and implement editorial and public relations strategies designed to heighten the visibility of our brands. All of these activities are coordinated around each brand in an integrated marketing approach.

While we continue to utilize traditional marketing and advertising vehicles such as print and media, we have also increased our focus on social media. Utilizing such areas as the company e-commerce platform, brand ambassadors, Twitter and Facebook, we have expanded our reach to customers who utilize these branding and shopping forums.

These same strategies, modified for each individual market, are used for our international efforts in more than a dozen other countries.

Seasonality and Backlog

Our products have historically been geared towards lighter weight apparel generally worn during the spring and summer months. We believe that this seasonality has been reduced with our introduction of fall, winter and holiday merchandise. The swimwear business, however, is highly seasonal in nature, with the vast majority of our sales occurring in our first and fourth quarters.

 

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We generally receive orders from our retailers approximately five to seven months prior to shipment. For the majority of our sales, we have orders from our retailers before we place orders with our suppliers. A summary of the order and delivery cycle for our four primary selling seasons, excluding swimwear, is illustrated below:

 

Merchandise Season

  

Advance Order Period

  

Delivery Period to Retailers

Spring    July to September    January to March
Summer    October to December    April and May
Fall    January to March    June to September
Holiday    April to June    October and November

Sales and receivables are recorded when inventory is shipped. Our backlog of orders includes confirmed and unconfirmed orders, which we believe, based on our past experience and industry practice will be confirmed. As of March 5, 2012, the backlog for orders of our products, all of which are expected to be shipped during fiscal 2013, was approximately $464 million, as compared to approximately $459 million as of April 1, 2011. The amount of unfilled orders at a point in time is affected by a number of factors, including the mix of product, the timing of the receipt and processing of customer orders and the scheduling of the sourcing and shipping of the product, which in most cases depends on the desires of the customer. Our backlog is also affected by an on-going trend among retailers to reduce the lead-time on their orders. In recent years, our customers have been more cautious of their inventory levels and have delayed placing orders and re-orders compared to our previous experience. Due to these factors a comparison of unfilled orders from period to period is not necessarily meaningful and may not be indicative of eventual actual shipments.

Supply of Products and Quality Control

We currently use independent contract manufacturers to supply the substantial majority of the products we sell. Of the total units of sourced products in fiscal 2012, 82% was sourced from suppliers in Asia, 6% was sourced from suppliers in the Americas and 12% was sourced from suppliers in the Middle East, respectively. We believe that the use of numerous independent contract manufacturers allows us to maximize production flexibility, while avoiding significant capital expenditures, work-in-process inventory build-ups and the costs of maintaining and operating production facilities. We have had relationships with some suppliers for over 30 years, however, none of these relationships are formal or require either party to purchase or supply any fixed quantity of product.

The vast majority of our products are purchased as “full packages,” where we place an order with the supplier and the supplier purchases all the raw materials, assembles the garments and ships them to our distribution facilities or third party facilities.

We maintain a staff of experienced sourcing professionals in six offices in China (including two in Hong Kong), as well as the United States, South Korea, Taiwan, Bangladesh, Indonesia and Vietnam. This staff sources our products worldwide, monitors our suppliers’ purchases of raw material, and monitors production at contract manufacturing facilities in order to ensure quality control and timely delivery. We also operate through independent agents in Asia and the Middle East. Our personnel based in our Miami, Florida office perform similar functions with respect to our suppliers in the Americas. We conduct inspections of samples of each product prior to cutting by contractors, during the manufacturing process and prior to shipment. We also have full-time quality assurance inspectors located globally.

Generally, the foreign contractors purchase the raw material in accordance with our specifications. Raw materials, which are in most instances made and/or colored especially for us, consist principally of piece goods and yarn and are specified by us from a number of foreign and domestic textile mills and converters.

We are committed to ethical sourcing standards and require our independent contractors to comply with our code of conduct. We monitor compliance by our foreign contract manufacturers with applicable laws and

 

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regulations relating to, for example, the payment of wages, working conditions and the environment. As part of our compliance program, we maintain compliance departments in the United States and overseas and routinely perform audits of our contract manufacturers and require corrective action when appropriate.

Import and Import Restrictions

Our import operations are subject to constraints imposed by bilateral trade agreements between the United States and a number of foreign countries. These agreements impose quotas on the amount and type of goods that can be imported into the United States from some countries. Most of our imported products are also subject to United States customs duties.

We closely monitor developments in quotas, duties, and tariffs and continually seek to minimize our exposure to these risks through, among other things, geographical diversification of our contract manufacturers, maintaining our overseas offices, allocating overseas production to product categories where more quotas are available, and shifting of production among countries and manufacturers.

Under the terms of the World Trade Organization (“WTO”) Agreement on Textiles and Clothing, WTO members removed all quotas effective January 1, 2005, and the current environment over textile quotas continues to rapidly change. While the danger of quota embargoes has subsided since the removal of quotas for WTO member countries, threats to some apparel categories in China and Vietnam present themselves on occasion through proposed protectionist legislation in the US Congress. These events are closely monitored and our board and executive level memberships in various apparel trade associations ensure early awareness and communication to our sourcing staff.

We believe that our extensive management and sourcing capability, our flexible sourcing model, and our experience and relationships throughout the world enable us to take advantage of the changing textile and apparel environment. Because of our sourcing experience, capabilities and relationships, we believe we are well positioned to take advantage of the changing textile and apparel quota environment.

Competition

The apparel industry is highly competitive and fragmented. Our competitors include numerous apparel designers, manufacturers, importers, licensors, and our own customers’ private label programs, many of which are larger and have greater financial and marketing resources than we have available to us. We believe that the principal competitive factors in the industry are: (1) brand name and brand identity, (2) timeliness, consistency, reliability and quality of services provided, (3) market share and visibility, (4) price, and (5) the ability to anticipate customer and consumer demands and maintain appeal of products to customers.

We strive to focus on these points and have proven our ability to anticipate and respond quickly to customer demands with our brands, range of products and our ability to operate within the industry’s production and delivery constraints. We believe that our continued dedication to customer service, product assortment and quality control, as well as our aggressive pursuit of licensing and acquisition opportunities, directly addresses the competitive factors in all market segments. Our established brands and relationships with retailers have resulted in a loyal following of customers.

We understand that the level of competition and the nature of our competitors vary by product segment. In particular, in the mass market channel, manufacturers constitute our main competitors in this less expensive segment of the market, while high profile domestic and foreign designers and licensors account for our main competitors in the more upscale segment of the market. Although we have been able to compete successfully to date, there can be no assurance that significant new competitors will not develop in the future.

 

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Trademarks

Our material trademarks are registered with the United States Patent and Trademark Office and in other countries. We regard our trademarks and other proprietary rights as valuable assets that are critical in the marketing of our products, and, therefore, we vigorously protect our trademarks against infringements.

Environmental Matters

We are committed to minimizing the negative impact of our business activities on the environment and believe our operations are in compliance with all applicable laws and regulations. Additionally, our business activities could be negatively impacted by severe weather conditions which could affect the sale of our products or disrupt our sourcing.

Employees

As of March 5, 2012, we had approximately 2,600 employees worldwide compared to approximately 2,400 employees as of March 1, 2011. None of our employees is subject to a collective bargaining agreement. We consider our employee relations to be satisfactory.

Item 1A. Risk Factors

Our business faces certain risks. The risks described below may not be the only risks we face. Additional risks that we do not yet know of or that we currently think are immaterial may also impair our business. If any of the events or circumstances described as risks below or elsewhere in this report actually occurs, our business, results of operations or financial condition could be materially and adversely affected.

We rely on a few key customers, and a significant decrease in business from the loss of any one key customer or key program could substantially reduce our revenues and harm our business.

We derive a significant amount of our revenues from a few major customers. For example, net sales to our five largest customers accounted for approximately 49%, 50% and 53% of net sales for fiscal 2012, 2011 and 2010, respectively. For fiscal 2012, three customers accounted for over 10% of net sales; Kohl’s, Marmaxx and Macy’s accounted for approximately 16%, 10% and 10% of net sales, respectively. For fiscal 2011, two customers accounted for over 10% of net sales; Kohl’s and Macy’s accounted for approximately 19% and 11% of net sales, respectively. For fiscal 2010, two customers accounted for over 10% of net sales; Kohl’s and Macy’s accounted for approximately 20%, and 11% of net sales, respectively. A significant decrease in business from or loss of any of our major customers could harm our financial condition by causing a significant decline in revenues.

We do not have long-term contracts with any of our customers and purchases generally occur on an order-by-order basis. We believe that purchasing decisions are generally made independently by individual department stores within a company-controlled group. There has been a trend, however, toward more centralized purchasing decisions. As such decisions become more centralized, the risk to us of such concentration increases. Furthermore, our customers could curtail or cease their business with us because of changes in their strategic and operational initiatives, such as an increased focus on private label, consolidation with another retailer, changes in our customer’s buying patterns, financial instability and other reasons. If our customers curtail or cease business with us, our revenues could significantly decrease and our financial condition could be significantly harmed.

Recent and future economic conditions, including turmoil in the financial and credit markets, may adversely affect our business.

Recent economic conditions may adversely affect our business, our customers, and our financing and other contractual arrangements. In addition, conditions may remain depressed in the future or may be subject to further deterioration. Recent and future developments in the United States and global economies may lead to

 

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further reductions in consumer spending, which could have an adverse effect on the sales of our products. Such events could adversely affect the business of our wholesale and retail customers, which may among other things, result in financial difficulties leading to restructuring, bankruptcies, liquidations, and other unfavorable events of our customers, and may cause such customers to reduce or discontinue orders of our products. Financial difficulties of our customers may also affect the ability of our customers to access credit markets or lead to higher credit risk relating to receivables from customers. Recent or future turmoil in the financial and credit markets could make it more difficult for us to obtain financing or refinance existing debt when the need arises or on terms that would be acceptable to us.

Domestic and international political situations may also affect consumer confidence. The threat, outbreak or escalation of terrorism, military conflicts or other hostilities could lead to further decreases in consumer spending.

The worldwide apparel industry is heavily influenced by general economic condition, which could negatively impact our orders and our overall results of operations.

The apparel industry is highly cyclical and heavily dependent upon the overall level of consumer spending. Purchases of apparel and related goods tend to be highly correlated with cycles in the disposable income of consumers. Our wholesale customers may anticipate and respond to adverse changes in economic conditions and uncertainty by reducing inventories and canceling orders. Accordingly, a reduction in consumer spending in any of the regions in which we compete as a result of any substantial deterioration in general economic conditions (including as a result of uncertainty in world financial markets, weakness in the credit markets, the recent housing slump in the United States, increases in the price of fuel, international turmoil or terrorist attacks) or increases in interest rates could adversely affect the sales of our products.

We may not be able to anticipate consumer preferences and fashion trends, which could negatively affect acceptance of our products by retailers and consumers and result in a significant decrease in net sales.

Our failure to anticipate, identify and respond effectively to changing consumer demands and fashion trends could adversely affect acceptance of our products by retailers and consumers and may result in a significant decrease in net sales or leave us with a substantial amount of unsold inventory. We believe that our success depends on our ability to anticipate, identify and respond to changing fashion trends in a timely manner. Our products must appeal to a broad range of consumers whose preferences cannot be predicted with certainty and are subject to rapid change. We may not be able to continue to develop appealing styles or successfully meet constantly changing consumer demands in the future. In addition, any new products or brands that we introduce may not be successfully received by retailers and consumers. Due to the acquisitions of Laundry by Shelli Segal, C&C California and Rafaella, we have increased our exposure to women’s apparel, thus making us subject to additional changes in fashion trends as women’s fashion trends have historically changed more rapidly than men’s. If our products are not successfully received by retailers and consumers and we are left with a substantial amount of unsold inventory, we may be forced to rely on markdowns or promotional sales to dispose of excess, slow-moving inventory. If this occurs, our business, financial condition, results of operations and prospects may be harmed.

The failure of our suppliers to use acceptable ethical business practices could cause our business to suffer.

We require our suppliers to operate in compliance with applicable laws and regulations regarding working conditions, employment practices and environmental compliance. Additionally, we or our customers’ operating guidelines may require additional obligations in those areas. We do not, however, control our suppliers or their labor and other business practices. If one of our suppliers violates labor or other laws or implements labor or other business practices that are generally regarded as unethical in the United States, the shipment of finished products to us could be interrupted, orders could be cancelled, relationships could be terminated and our reputation could be damaged. Any of these events could have a material adverse effect on our revenue and, consequently, our results of operations.

 

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Increases in the prices of raw materials used to manufacture our products or increases in costs to transport our products could materially increase our costs and decrease our profitability.

The principal fabrics used in our business are made from cotton, wool, silk, synthetic and cotton-synthetic blends. The prices we pay for these fabrics are dependent on the market prices for the raw materials used to produce them, primarily cotton and chemical components of synthetic fabrics. These raw materials are subject to price volatility caused by weather, supply conditions, government regulations, energy costs, economic climate and other unpredictable factors. Fluctuations in petroleum prices may also influence the prices of related items such as chemicals, dyestuffs and polyester yarn as well as the costs we incur to transport products from our suppliers and costs we incur to distribute products to our customers. Any raw material price increase or increase in costs related to the transport of our products (primarily petroleum costs) could increase our cost of sales and decrease our profitability unless we are able to pass higher prices on to our customers. In addition, if one or more of our competitors is able to reduce its production costs by taking greater advantage of any reductions in raw material prices or favorable sourcing agreements, we may face pricing pressures from those competitors and may be forced to reduce our prices or face a decline in net sales, either of which could have an adverse effect on our business, results of operations or financial condition.

Fluctuations in the price, availability and quality of the fabrics or other raw materials used to manufacture our products, as well as the price for labor, marketing and transportation, could have a material adverse effect on our cost of sales or our ability to meet our customers’ demands. The prices for such fabrics depend largely on the market prices for the raw materials used to produce them. The price and availability of such raw materials may fluctuate significantly, depending on many factors. In the future, we may not be able to pass all or a portion of such higher prices on to our customers.

We are dependent upon the revenues generated by our licensing of brands from third parties, and the loss or inability to renew certain of these licenses could reduce our net income.

The interruption of the business of third parties that license their brands to us could adversely affect our net income. We currently license the Nike, Jag, Champions Tour, PGA TOUR, Callaway Golf, Top-Flite and Pierre Cardin brands from third parties. These licenses vary in length of term, renewal conditions and royalty obligations. The average term of these licenses is three to five years with automatic renewals depending upon whether we achieve certain targeted sales goals. We may not be able to renew or extend any of these licenses on favorable terms, if at all. If we are unable to renew or extend any of these licenses, we could experience a decrease in net income.

We are dependent upon the revenues generated by the licensing of our brands to third parties, and the loss or inability to renew certain of these licenses could reduce our royalty income and consequently reduce our net income.

The loss of several licensees of our brands at any one time could adversely affect our royalty income and net income. Royalty income from licensing our brands to third parties accounted for $25.0 million, or 3% of total revenues, for fiscal 2012 and $26.4 million, or 3% of total revenues, for fiscal 2011. These licenses vary in length of term, renewal conditions and royalty obligations. The average term of these licenses is three to five years with automatic renewals depending upon whether certain targeted sales goals are met. We may not be able to renew or extend any of these licenses on favorable terms, if at all. If we are unable to renew or extend any of these licenses, we could experience a decrease in royalty income and net income.

Our business could be harmed if we do not deliver quality products in a timely manner.

Our sourcing, logistics and technology functions operate within substantial production and delivery requirements and subjects us to the risks associated with suppliers, transportation, distribution facilities and other risks. If we do not comply with customer product requirements or meet their delivery requirements, our customers could reduce our selling prices, require significant margin support, reduce the amount of business they do with us, or cease to do business with us, all of which could harm our business.

Our sales and operating results are influenced by weather patterns and natural disasters.

 

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Like other companies in the apparel industry, our sales volume may be adversely affected by unseasonable weather conditions or natural disasters, which may cause consumers to alter their purchasing habits or result in a disruption to our operations. Because of the seasonality of our business and the concentration of a significant proportion of our customers in certain geographic regions, the occurrence of such events could disproportionately impact our business, financial condition and operating results.

We are subject to United States federal and state laws and, and if any of the laws or regulations are amended or if new laws or regulations are adopted, compliance could become more expensive and directly affect our income.

We are subject to U.S. federal, state and local laws and regulations affecting our business, including those promulgated under the Occupational Safety and Health Act, the Consumer Product Safety Act, the Flammable Fabrics Act, the Textile Fiber Product Identification Act, the rules and regulations of the Consumer Products Safety Commission, the Department of Homeland Security and various labor, workplace and related laws, as well as environmental laws and regulations. If any of these laws is amended or new laws are adopted, compliance could become more costly, and our failure to comply with such laws may expose us to potential liabilities, which could have an adverse impact on our results of operation.

Because we do business abroad, our business could be harmed if changes in political or economic stability, laws, exchange rates, or foreign trade policies should occur.

Our relationship with our foreign suppliers subjects us to the risks of doing business abroad. Because some of our suppliers are located at great geographic distances from us, our transportation costs are increased and longer lead times are required, which reduces our flexibility. Our finished goods are also subject to import duties, quotas and other restrictions. Other risks in doing business with foreign suppliers include political or economic instability, any significant fluctuations in the value of the dollar against foreign currencies, terrorist activities, and restrictions on the transfer of funds. Our efforts to maintain compliance with local laws and regulations may require us to incur significant expenses, and our failure to comply with such laws may expose us to potential liability, which could have an adverse effect on our results of operations.

Although we have not been affected in a material way by any of the foregoing factors, we cannot predict the likelihood or frequency of any such events occurring and any material disruption may have an adverse affect on our business.

We may face challenges integrating the operations of our recently acquired brands or any businesses we may acquire, which may negatively impact our business.

As part of our strategy of making selective acquisitions, we acquire new brands and product categories, including our recent acquisitions of Rafaella and Ben Hogan. Acquisitions have inherent risks, including the risk that the projected sales and net income from the acquisition may not be generated, the risk that the integration is more costly and takes longer than anticipated, risks of retaining key personnel, and risks associated with unanticipated events and unknown legal liabilities. Any of these and other risks may harm our business. We cannot assure you that any acquisition will not have a material adverse impact on our financial conditions and results of operations.

With respect to previous acquisitions, we faced challenges in consolidating functions and integrating management procedures, personnel and operations in an efficient and effective manner, which if not managed as projected, could have negatively impacted our business. Some of these challenges included increased demands on management related to the significant increase in the size and diversity of our business after the acquisition, the dedication of management’s attention to implement our strategies for the business, the retention and integration of key employees, determining aspects of the acquired business that were to be kept separate and distinct from our other businesses, and difficulties in assimilating corporate culture and practices into ours.

We have a significant amount of debt, which could have important negative consequences to us, including making it difficult for us to satisfy all of our obligations in the event we experience financial difficulties.

 

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We have a significant amount of debt. As of January 28, 2012, we had approximately $197.5 million of debt outstanding (excluding amounts outstanding under our letter of credit facility). Our indebtedness could have important consequences, including:

 

   

making it more difficult for us to satisfy our obligations with respect to our senior subordinated notes,

 

   

increasing our vulnerability to adverse general economic and industry conditions, as we are required to devote a proportionally greater amount of our cash flow to paying principal and interest on our recently issued debt,

 

   

limiting our ability to obtain additional financing to fund capital expenditures, acquisitions and other general corporate requirements,

 

   

requiring us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund capital expenditures, acquisitions or other general corporate purposes,

 

   

increasing our vulnerability to adverse changes in governmental regulations,

 

   

limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate, and

 

   

placing us at a competitive disadvantage compared to our less leveraged competitors during periods in which we experience lower earnings and cash flow.

Our ability to pay interest on our indebtedness and to satisfy our other debt obligations will depend upon, among other things, our future operating performance and cash flow and our ability to refinance indebtedness when necessary. Each of these factors is, to a large extent, dependent on general economic, financial, competitive, legislative, regulatory and other factors beyond our control. If, in the future, we cannot generate sufficient cash from operations to make scheduled payments on our indebtedness or to meet our liquidity needs or other obligations, we will need to refinance our existing debt, obtain additional financing or sell assets. If we are unable to do so, we cannot assure you that we will be able otherwise to renegotiate or refinance any of our debt, or obtain additional debt, on commercially reasonable terms or at all. We cannot assure you that our business will generate cash flow, or that we will be able to obtain funding sufficient to satisfy our debt service requirements.

Our profitability may decline as a result of increasing pressure on margins.

The apparel industry is subject to significant pricing pressure caused by many factors, including intense competition, consolidation in the retail industry, pressure from retailers to reduce the costs of products and changes in consumer spending patterns. These factors may cause us to reduce our sales prices to retailers and consumers, which could cause our gross margin to decline if we are unable to appropriately manage inventory levels and/or reduce our operating costs. If we fail to adequately manage our product costs or operating expenses, our profitability will decline. This could have a material adverse effect on our results of operations, liquidity and financial condition.

Our ability to conduct business in international markets may be affected by legal, regulatory, political and economic risks.

Our ability to capitalize on growth in new international markets and to maintain the current level of operations in our existing international markets is subject to risks associated with international operations. These include:

 

   

the burdens of complying with a variety of foreign laws and regulations,

 

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unexpected changes in regulatory requirements,

 

   

new tariffs or other barriers in some international markets,

 

   

political instability and terrorist attacks,

 

   

changes in diplomatic and trade relationships, and

 

   

general economic fluctuations in specific countries or markets.

We cannot predict whether quotas, duties, taxes, or other similar restrictions will be imposed by the United States, the European Union, countries in Asia, or other countries upon the import or export of our products in the future, or what effect any of these actions would have on our business, financial condition or results of operations. Changes in regulatory, geopolitical, social or economic policies and other factors may have a material adverse effect on our business in the future or may require us to significantly modify our current business practices.

We operate in a highly competitive and fragmented industry and our failure to successfully compete could result in a loss of one or more significant customers.

The apparel industry is highly competitive and fragmented. Our competitors include numerous apparel designers, manufacturers, importers and licensors, many of which have greater financial and marketing resources than us. We believe that the principal competitive factors in the apparel industry are:

 

   

brand name and brand identity,

 

   

timeliness, reliability and quality of services provided,

 

   

market share and visibility,

 

   

the ability to obtain sufficient retail floor space,

 

   

price, and

 

   

the ability to anticipate customer and consumer demands and maintain appeal of products to customers.

The level of competition and the nature of our competitors varies by product segment with low-margin, mass-market manufacturers being our main competitors in the less expensive segment of the market and U.S. and foreign designers and licensors competing with us in the more upscale segment of the market. If we do not maintain our brand names and identities and continue to provide high quality and reliable services on a timely basis at competitive prices, we may not be able to continue to successfully compete in our industry. If we are unable to compete successfully, we could lose one or more of our significant customers, which, if not replaced, could negatively impact our sales and financial performance.

Our success depends upon the continued protection of our trademarks and other intellectual property rights.

Our registered and common law trademarks, as well as certain of our licensed trademarks, have significant value and are instrumental to our ability to market our products. Our failure to successfully protect our intellectual property rights, or the substantial costs that we may incur in doing so, may have an adverse effect on our operations.

 

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We may have additional tax liabilities.

We are subject to income taxes in the United States and many foreign jurisdictions. In addition to judgments associated with valuation accounts, our current tax provision can be affected by our mix of income and identification or resolution of uncertain tax positions. Because income from domestic and international sources may be taxed at different rates, the shift in mix during a year or over years can cause the effective tax rate to change. We regularly are under audit by tax authorities. Although we believe our tax estimates are reasonable, the final determination of our tax liabilities as a result of tax audits and any related litigation could be materially different from our historical income tax provisions and accruals. The results of an audit or litigation could have a material effect on our financial position, results of operations, or cash flows in the period or periods for which that determination is made. In addition, there have been proposals to reform U.S. tax laws that would significantly impact how U.S. multinational corporations are taxed on foreign earnings. We earn a portion of our income in foreign countries. Although we cannot predict whether or in what form this proposed legislation will pass, if enacted it could have a material adverse impact on our tax expense and cash flow.

We depend on certain key personnel the loss of which could negatively impact our ability to manage our business.

Our future success depends to a significant extent on retaining the services of certain executive officers and directors, in particular George Feldenkreis, our Chairman of the Board and Chief Executive Officer, and Oscar Feldenkreis, our Vice Chairman, President and Chief Operating Officer. They are each party to an employment agreement that expires in 2013. The loss of the services of either George Feldenkreis or Oscar Feldenkreis, or any other key member of management, could have a material adverse effect on our ability to manage our business. Our continued success is dependent upon our ability to attract and retain qualified management and operational personnel to support our future growth. Our inability to do so may have a significant negative impact on our ability to manage our business.

Item 1B. Unresolved Staff Comments

None.

Item 2. Properties

The general location, use, ownership status, approximate size, and lease expiration dates of the principle properties which we currently occupy are set forth below:

 

Location

  

Use

  

Lease
Expiration

  

Ownership
Status

   Approximate
Area in
Square Feet
 

Miami, Florida

  

Principle Executive and Administrative Offices; Warehouse and Distribution Facility

   N/A   

Owned

     240,000   

Miami, Florida

  

Distribution and Administrative Functions

   July 2014   

Leased

     66,000   

Seneca, South Carolina

  

Distribution Center

   N/A   

Owned

     345,000   

Winnsboro, South Carolina

  

Distribution Center

   N/A   

Owned

     380,000   

Tampa, Florida

  

Distribution Center

   N/A   

Owned

     305,000   

Beijing, China

  

3 Administrative Office Units

   N/A   

Owned

     12,000   

New York City, New York

  

Office, Design and Showrooms

   December 2012 thru December 2017   

Leased

     193,000   

Portland, Oregon

  

Office Space

   August 2012   

Leased

     19,427   

Commerce, California

  

Office Space

   December 2012   

Leased

     39,400   

Witham, UK

  

Distribution and Administrative Functions

   2016   

Leased

     70,000   

 

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In addition, we lease several locations in Texas, Wisconsin, and California totaling approximately 9,400 square feet of office space.

We also lease 65 retail stores, comprising approximately 179,000 square feet of selling space in the United States and United Kingdom.

In addition, we lease several locations internationally totaling approximately 50,000 square feet of office and retail space.

Our principal executive and administrative office, warehouse and distribution facility is encumbered by a $12.6 million mortgage, which loan is due on August 1, 2020. The facility in Tampa, Florida is encumbered by a $13.5 million mortgage, which loan is due on June 7, 2016. During fiscal 2009, we closed our Winnsboro distribution facility and such property is currently listed for sale.

Item 3. Legal Proceedings

The Company is, from time to time, a party to litigation that arises in the normal course of its business operations. The Company is not presently a party to any litigation that it believes might have a material adverse effect on its business operations.

Item 4. Mine Safety Disclosures

Not applicable.

PART II

Item 5. Market for Registrant’s Common Equity and Related Shareholder Matters

 

(a) Market Information

Our common stock is currently listed for trading on the NASDAQ Global Select Market under the symbol “PERY” and was previously listed for trading on the Nasdaq Global Market (formerly the Nasdaq National Market) under the symbol “PERY” since June 1999. Prior to that date, our trading symbol was “SUPI” based upon our former name, Supreme International Corporation. The following table sets forth, for the periods indicated, the range of high and low per share bids of our common stock as reported by the NASDAQ Global Select Market. Such quotations represent inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.

 

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     High      Low  

Fiscal Year 2012

     

First Quarter

   $ 32.84       $ 24.38   

Second Quarter

     31.50         22.88   

Third Quarter

     25.41         16.19   

Fourth Quarter

     25.44         12.22   

Fiscal Year 2011

     

First Quarter

   $ 26.75       $ 14.92   

Second Quarter

     25.98         16.85   

Third Quarter

     25.04         18.32   

Fourth Quarter

     30.01         21.35   

 

(b) Holders

As of April 9, 2012, there were approximately 190 registered shareholders of record of our common stock. We believe the number of beneficial owners of our common stock is in excess of 2,300.

 

(c) Dividends

We have not paid any cash dividends since our inception and do not contemplate doing so in the near future. Payment of cash dividends is prohibited under our senior credit facility and the indenture governing our senior subordinated notes. See footnotes 11 through 13 to our consolidated financial statements included in Item 8 of this Report. Any future decision regarding payment of cash dividends will depend on our earnings and financial position and such other factors, as our board of directors deems relevant.

 

(d) Securities Authorized for Issuance under Equity Compensation Plans

Equity Compensation Plan Information for Fiscal 2012

The following table summarizes as of January 28, 2012 the shares of our common stock subject to outstanding awards or available for future awards under our equity compensation plans.

 

Plan Category

   Number of shares
to be issued upon
exercise  of
outstanding
options, warrants
and rights
     Weighted-average
exercise price
of outstanding
options,
warrants  and
rights
     Number of  shares
remaining available
for future issuance
under equity
compensation plans
(excluding  shares
reflected in the first
column)
 

Equity compensation plans approved by security holders(1)

     1,392,085       $ 13.91         730,611   

Equity compensation plans not approved by security holders

     —           —           —     
  

 

 

    

 

 

    

 

 

 

Total

     1,392,085       $ 13.91         730,611   
  

 

 

    

 

 

    

 

 

 

 

(1) Represents awards made pursuant to our 1993 Stock Option Plan, our 2002 Equity Compensation Plan and our Second Amended and Restated 2005 Long-Term Incentive Compensation Plan.

 

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(e) Performance Graph

The following graph compares the cumulative total shareholder return on our common stock with the cumulative total shareholder return on the Nasdaq Composite and The S&P Apparel, Accessories & Luxury Goods Index commencing on February 1, 2007 and ending on January 28, 2012. The graph assumes that $100 was invested on February 1, 2007 in our common stock or in the Nasdaq Composite Index and The S&P Apparel, Accessories & Luxury Goods Index, and that all dividends are reinvested. Past performance is not necessarily indicative of future performance.

 

LOGO

 

                  

INDEXED RETURNS

Years Ending

        

Company / Index

   Base
2007
     2008      2009      2010      2011      2012  

Perry Ellis International, Inc.

   $ 100.00       $ 58.33       $ 12.76       $ 53.27       $ 93.55       $ 51.65   

NASDAQ Composite

     100.00         97.07         60.02         87.95         111.84         116.36   

S&P Apparel, Accessories and Luxury Goods

     100.00         72.13         37.84         71.50         100.55         142.15   

 

(f) Sales of Unregistered Securities

Not Applicable.

 

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(g) Purchase of Equity Securities by the Issuer and Affiliated Purchasers.

The following table provides information with respect to our purchases of Perry Ellis International common stock during the fourth quarter of fiscal 2012:

 

Period

   Total Number of
Shares Purchased
     Average
Price Paid
per Share
     Total Number of
Shares Purchased
as Part of Publicly
Announced  Plans
or Programs(1)
     Maximum
Approximate Dollar
Value that May Yet
Be Purchased  under
the Plans or
Programs
 

November 1, 2011 to November 30, 2011

     764,300       $ 13.41         764,300       $ 12,332,720   

December 1, 2011 to December 31, 2011

     393,000       $ 14.52         393,000       $ 6,627,533   
  

 

 

       

 

 

    

Total shares repurchased during Fiscal 2012

     1,157,300       $ 13.79         1,157,300       $ 6,627,533   
  

 

 

       

 

 

    

 

(1)

During November 2007, the Board of Directors authorized us to purchase, from time to time and as market and business conditions warrant, up to $20 million of our common stock for cash in the open market or in privately negotiated transactions over a 12-month period. In September 2008, 2009 and 2010, the Board of Directors extended the stock repurchase program for the next twelve months. In November 2011, the Board of Directors extended and increased the stock repurchase program, which now authorizes us to repurchase up to $40 million of our common stock for cash over the next twelve months. Although the Board of Directors allocated a maximum of $40 million to carry out the program, we are not obligated to purchase any specific number of outstanding shares and will reevaluate the program on an ongoing basis.

 

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Item 6. Selected Financial Data

Summary Historical Financial Information

(Amounts in thousands, except for per share data)

The following selected financial data is qualified by reference to, and should be read in conjunction with, the Consolidated Financial Statements of Perry Ellis and related Notes thereto included in Item 8 of this report and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

Fiscal Years Ended

   January 28,
2012
    January 29,
2011
    January 30,
2010
    January 31,
2009
    January 31,
2008
 

Income Statement Data:

          

Net sales

   $ 955,549      $ 763,884      $ 729,217      $ 825,868      $ 838,465   

Net royalty income

     25,043        26,404        24,985        25,429        25,401   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     980,592        790,288        754,202        851,297        863,866   

Cost of sales

     656,850        507,829        505,104        573,046        572,232   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     323,742        282,459        249,098        278,251        291,634   

Selling, general and administrative expenses

     248,618        220,018        200,356        236,840        215,873   

Depreciation and amortization

     13,673        12,211        13,625        14,784        13,278   

Impairment on long-lived assets

     6,066        392        254        22,299        —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     55,385        49,838        34,863        4,328        62,483   

Costs on early extinguishment of debt

     1,306        730        357        —          —     

Impairment on marketable securities

     —          —          —          2,797        —     

Interest expense

     16,103        13,203        17,371        17,491        17,594   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) before income taxes

     37,976        35,905        17,135        (15,960     44,889   

Income tax provision (benefit)

     12,459        11,393        3,615        (3,682     15,785   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     25,517        24,512        13,520        (12,278     29,104   

Less: Net income attributable to noncontrolling interest

     —          400        353        612        931   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to Perry Ellis International, Inc.

   $ 25,517      $ 24,112      $ 13,167      $ (12,890   $ 28,173   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to Perry Ellis International, Inc. per share:

          

Basic

   $ 1.71      $ 1.84      $ 1.04      $ (0.89   $ 1.92   

Diluted

   $ 1.60      $ 1.70      $ 1.01      $ (0.89   $ 1.80   

Weighted average number of shares outstanding

          

Basic

     14,927        13,110        12,699        14,416        14,675   

Diluted

     15,950        14,149        13,005        14,416        15,657   

Other Financial Data:

          

EBITDA (a)

   $ 69,058      $ 62,049      $ 48,488      $ 16,315      $ 75,761   

EBITDA margin (b)

     7.0     7.9     6.4     1.9     8.8

Cash flows from operations

     712        21,004        88,795        (4,982     91,292   

Cash flows from investing

     (2,327     (94,491     (2,034     (44,390     (19,307

Cash flows from financing

     7,011        73,600        (76,999     45,648        (64,911

Capital expenditures

     (13,811     (6,695     (3,749     (10,786     (18,955

Balance Sheet Data (at year end):

          

Working capital

   $ 289,916      $ 248,606      $ 188,056      $ 241,130      $ 217,870   

Total assets

     724,195        686,033        561,316        599,586        586,265   

Total debt (c)

     197,490        229,129        155,108        229,065        175,927   

Total stockholders’ equity

     366,495        302,940        270,116        252,101        276,820   

 

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a) EBITDA represents earnings before interest expense, cost on early extinguishment of debt, depreciation and amortization, noncontrolling interest and income taxes as outlined below in tabular format. EBITDA is not a measurement of financial performance under accounting principles generally accepted in the United States of America, and does not represent cash flow from operations. EBITDA is presented solely as a supplemental disclosure because we believe that it is a common measure of operating performance in the apparel industry. The following provides a reconciliation of net income to EBITDA:

 

Fiscal Years Ended

   January 28,
2012
     January 29,
2011
     January 30,
2010
     January 31,
2009
    January 31,
2008
 
                   In thousands               

Net income (loss) attributable to Perry Ellis International, Inc.

   $ 25,517       $ 24,112       $ 13,167       $ (12,890   $ 28,173   

Depreciation and amortization

     13,673         12,211         13,625         14,784        13,278   

Interest expense

     16,103         13,203         17,371         17,491        17,594   

Income tax provision (benefit)

     12,459         11,393         3,615         (3,682     15,785   

Net income attributable to noncontrolling interest

     —           400         353         612        931   

Costs on early extinguishment of debt

     1,306         730         357         —          —     
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

EBITDA

   $ 69,058       $ 62,049       $ 48,488       $ 16,315      $ 75,761   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

b) EBITDA margin represents EBITDA as a percentage of total revenues. EBITDA margin percentage of revenue is presented solely as a supplemental disclosure because we believe that it is a common measure of operating performance in the apparel industry. The following provides a reconciliation of gross profit to EBITDA margin as a percentage of revenue:

 

Fiscal Years Ended

   January 28,
2012
    January 29,
2011
    January 30,
2010
    January 31,
2009
    January 31,
2008
 
                 In thousands              

Gross profit

   $ 323,742      $ 282,459      $ 249,098      $ 278,251      $ 291,634   

Less:

          

Selling, general and administrative expenses

     248,618        220,018        200,356        236,840        215,873   

Impairment on long-lived assets

     6,066        392        254        22,299        —     

Impairment on marketable securities

     —          —          —          2,797        —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA

   $ 69,058      $ 62,049      $ 48,488      $ 16,315      $ 75,761   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

   $ 980,592      $ 790,288      $ 754,202      $ 851,297      $ 863,866   

EBITDA margin percentage of revenue

     7.0     7.9     6.4     1.9     8.8

 

c) Total debt includes balances outstanding under Perry Ellis’ senior credit facility, senior subordinated notes, real estate mortgages, and lease payable long term.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

We began operations in 1967 as Supreme International Corporation with a focus on marketing guayabera shirts, and other men’s apparel products targeted at the Hispanic market in Florida and Puerto Rico. Over time we expanded our product line to offer a variety of men’s sport shirts. In 1988, we added the Natural Issue brand and completed our initial public offering in 1993. In 1996, we began an expansion strategy through the acquisition of brands including the Munsingwear family of brands in 1996, the John Henry and Manhattan brands from Perry Ellis Menswear in 1999 and the Perry Ellis brand in 1999. Following the Perry Ellis acquisition, we changed our name from Supreme International Corporation to Perry Ellis International, Inc. to better reflect the name recognition that the brand provided. In 2002, we acquired the Jantzen brand and in June 2003 we acquired Perry Ellis Menswear, our largest licensee, giving us greater control of the Perry Ellis brand, as well as adding other brands owned by Perry Ellis Menswear. In February 2005, we completed an acquisition, making us one of the largest supplier’s of bottoms in the United States. In January 2006, we completed the acquisition of primarily all of the worldwide intellectual property of the leading California lifestyle company Gotcha International, including the Gotcha, Girl Star and MCD logo trademarks and the intellectual property license agreements. In February 2008, we completed the acquisition of the Laundry by Shelli Segal and C&C California brands giving us a stronger product line in dresses and women’s sportswear. In January 2011, we completed the acquisition of the Rafaella brand further increasing our product line in women’s sportswear. In February 2012, we completed the acquisition of Ben Hogan and further strengthened our golf product line.

We are one of the leading apparel companies in the United States. We manage a portfolio of major brands, some of which were established over 100 years ago. We design, source, market and license our products

 

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nationally and internationally at multiple price points and across all major levels of retail distribution in approximately 15,000 selling doors. Our portfolio of highly recognized brands includes the Perry Ellis® family of brands, Axis®, Tricots St. Raphael®, Jantzen®, John Henry®, Cubavera®, the Havanera Co.®, Centro®, Solero®, Chispa®, Natural Issue®, Munsingwear®, Grand Slam®, Original Penguin® by Munsingwear® (“Original Penguin”), Mondo di Marco®, Redsand®, Pro Player®, Manhattan®, Axist®, Savane®, Farah®, Gotcha®, Girl Star®, MCD®, Laundry by Shelli Segal®, C&C California®, Rafaella®, and Ben Hogan®. We also (i) license the Nike® brand for swimwear and swimwear accessories, (ii) license the Jag® brand for men’s and women’s swimwear and cover-ups, (iii) license the Callaway Golf® brand and Top-Flite® for golf apparel, (iv) license the PGA TOUR® brand, including Champions Tour®, for golf apparel, and (v) license Pierre Cardin® for men’s sportswear.

We distribute our products primarily to wholesale customers that represent all major levels of retail distribution including department stores, national and regional chain stores, mass merchants, specialty stores, sporting goods stores, the corporate wear market, e-commerce, as well as clubs and independent retailers in the United States, Canada, Mexico, the United Kingdom and Europe. Our largest customers include Kohl’s Corporation (“Kohl’s”), Macy’s, Inc. (“Macy’s”), The Marmaxx Group, Dillard’s Inc. (“Dillard’s”) and Sam’s Wholesale Club (“Sam’s”). As of March 5, 2012, we operated 40 Perry Ellis and five Original Penguin retail outlet stores located primarily in upscale retail outlet malls across the United States, United Kingdom and Puerto Rico. As of March 5, 2012 we also operated two Perry Ellis, one Cubavera and 17 Original Penguin full price retail stores located in upscale demographic markets in the United States and United Kingdom. In addition, we leverage our design, sourcing and logistics expertise by offering a limited number of private label programs to retailers. In order to maximize the worldwide exposure of our brands and generate high margin royalty income, we license our brands through three worldwide, 44 domestic, and 84 international license agreements covering over 100 countries.

In fiscal 2012, our Men’s Sportswear and Swim segment, which is comprised of men’s sportswear, swimwear and swimwear accessories, accounted for 73% of our total revenues, our Women’s Sportswear segment accounted for 17% of our total revenues, our Direct-to-Consumer segment, which is comprised of retail and e-commerce, accounted for 7% of our total revenues and our Licensing segment accounted for approximately 3% of our total revenues. Finally, our U.S. based business represented approximately 92% of total revenues, while our foreign operations represented 8% for fiscal 2012.

Our licensing business is a significant contributor to our operating income. We license the brands we own to third parties for the manufacturing and marketing of various products in distribution channels and countries in which we do not distribute those brands, including men’s and women’s apparel and footwear, men’s suits, underwear, loungewear, outerwear, fragrances, eyewear and accessories. These licensing arrangements heighten the overall awareness of our brands without requiring us to make capital investments or incur additional operating expenses. We employ a three-dimensional strategy in the design, sourcing, marketing and licensing of our products that focuses on diversity of brands, products and distribution channels. Through this strategy, we provide our products to a broad range of customers, which reduces our reliance on any single distribution channel, customer, or demographic group and minimizes competition among our brands.

Our products have historically been geared towards lighter weight apparel generally worn during the spring and summer months. We believe that this seasonality has been reduced with the strengthening of our fall, winter, and holiday merchandise. Our swimwear business, however, is highly seasonal in nature, with the significant majority of its sales occurring in our first and fourth quarters. Seasonality can be affected by a variety of factors, including the mix of advance and fill-in orders, the amount of sales to different distribution channels, and overall product mix among traditional merchandise, fashion merchandise and swimwear. Our higher-priced products generally tend to be less sensitive to economic and weather conditions. Revenues for our second quarter will typically be lower than our other quarters due to the impact of seasonal sales.

We believe that our future growth will come as a result of organic growth from our continued emphasis on our existing brands; new and expanded product lines; domestic and international licensing opportunities;

 

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international, direct retail and e-commerce opportunities and selective acquisitions and opportunities that fit strategically with our business model. Our future results may be impacted by risks and trends set forth in “Item 1A. Risk Factors” and elsewhere in this report.

Recent Accounting Pronouncements

See Notes to the Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data” for recent accounting pronouncements.

Critical Accounting Policies

Included in the footnotes to the consolidated financial statements in this report is a summary of all significant accounting policies used in the preparation of our consolidated financial statements. We follow the accounting methods and practices as required by accounting principles generally accepted in the United States of America (“GAAP”). In particular, our critical accounting policies and areas we use judgment are in revenue recognition, the estimated collectability of accounts receivable, the recoverability of obsolete or overstocked inventory, the impairment of long-lived assets that are our trademarks and goodwill, and the measurement of retirement related benefits.

Revenue Recognition. Sales are recognized at the time legal title to the product passes to the customer, generally FOB Perry Ellis’ distribution facilities, net of trade allowances and a provision for estimated returns and other allowances, considering historical and anticipated trends. Revenues are recorded net of corresponding sales taxes. Royalty income is recognized when earned on the basis of the terms specified in the underlying contractual agreements.

Accounts Receivable. We maintain an allowance for doubtful accounts receivable and an allowance for estimated trade discounts, co-op advertising, allowances provided to retail customers to flow goods through the retail channel, and losses resulting from the inability of our retail customers to make required payments considering historical and anticipated trends. Management reviews these allowances and considers the aging of account balances, historical bad debt experience, changes in customer creditworthiness, current economic trends, customer payment activity and other relevant factors. A small portion of our accounts receivable are insured for collections. Should any of these factors change, the estimates made by management may also change, which could affect the level of future provisions.

Inventories. Our inventories are valued at the lower of cost or market value. Estimates and judgment are required in determining what items to stock and at what levels, and what items to discontinue and how to value them. We evaluate all of our inventory style-size-color stock keeping units, or SKUs, to determine excess or slow-moving SKUs based on orders on hand and projections of future demand and market conditions. For those units in inventory that are so identified, we estimate their market value or net sales value based on current realization trends. If the projected net sales value is less than cost, on an individual SKU basis, we write down inventory to reflect the lower value. This methodology recognizes projected inventory losses at the time such losses are evident rather than at the time goods are actually sold.

Intangible Assets. We review our intangible assets with indefinite useful lives for possible impairments at least annually and perform impairment testing during the fourth quarter of each year by among other things, obtaining independent third party valuations. We evaluate the “fair value” of our identifiable intangible assets for purposes of recognition and measurement of impairment losses. Evaluating indefinite useful life assets for impairment involves certain judgments and estimates, including the interpretation of current economic indicators and market valuations, and our strategic plans with regard to our operations, historical and anticipated performance of our operations and other factors. If we incorrectly anticipate these trends or unexpected events occur, our results of operations could be materially affected. We estimate the fair value of the trademarks based on an income approach using the relief-from-royalty method. This methodology assumes that, in lieu of ownership, a third party would be willing to pay a royalty in order to exploit the related benefits of trademark assets. The cash flow models we use to estimate the fair values of its trademarks involve several assumptions.

 

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Changes in these assumptions could materially impact its fair value estimates. Assumptions critical to the fair value estimates are: (i) discount rates used to derive the present value factors used in determining the fair value of the trademarks; (ii) royalty rates used in the trademark valuations; (iii) projected revenue growth rates; and (iv) projected long-term growth rates used in the derivation of terminal year values. These and other assumptions are impacted by economic conditions and expectations of management and could change in the future based on period-specific facts and circumstances. We base our fair value estimates on assumptions we believe to be reasonable, but which are unpredictable and inherently uncertain.

Goodwill. Goodwill represents the excess of the purchase price and related costs over the value assigned to tangible and identifiable intangible assets of businesses acquired and accounted for under the purchase method. We review at least annually for possible goodwill impairment during the fourth quarter of each year using a discounted cash flow analysis that requires that certain assumptions and estimates be made regarding industry economic factors and future profitability and cash flows. Evaluating goodwill for impairment involves certain judgments and estimates, including the interpretation of current economic indicators and market valuations, and our strategic plans with regard to our operations, historical and anticipated performance of our operations and other factors. If we incorrectly anticipate these trends or unexpected events occur, our results of operations could be materially affected. Assumptions critical to the fair value estimates are: (i) discount rates used to derive the present value factors used in determining the fair value of each reporting unit; (ii) projected revenue and expense growth rates; and (iii) projected long-term growth rates used in the derivation of terminal year values. The goodwill impairment test is a two-step process that requires us to make decisions in determining appropriate assumptions to use in the calculation. The first step consists of estimating the fair value of each reporting unit and comparing those estimated fair values with the carrying values, which include the allocated goodwill. If the estimated fair value is less than the carrying value, a second step is performed to compute the amount of the impairment, if any, by determining an “implied fair value” of goodwill. The determination of each reporting unit’s implied fair value of goodwill requires us to allocate the estimated fair value of the reporting unit to its assets and liabilities. Any unallocated fair value represents the implied fair value of goodwill which is compared to its corresponding carrying amount.

Retirement-Related Benefits. The pension obligations related to our defined benefit pension plans are developed from actuarial valuations. Inherent in these valuations are key assumptions, including the discount rate, expected return of plan assets, future compensation increases, and other factors, which are updated on an annual basis. Management is required to consider current market conditions, including changes in interest rates, in making these assumptions. Actual results that differ from the assumptions are accumulated and amortized over future periods, and therefore, generally affect the recognized pension expense or benefit and our pension obligation in future periods. The fair value of plan assets is based on the performance of the financial markets, particularly the equity markets. Therefore, the market value of the plan assets can change dramatically in a relatively short period of time. Additionally, the measurement of the plan’s benefit obligation is highly sensitive to changes in interest rates. As a result, if the equity market declines and/or interest rates decrease, the plan’s estimated accumulated benefit obligation could exceed the fair value of the plan assets and therefore, we would be required to establish an additional minimum liability, which would result in a reduction in shareholders’ equity for the amount of the shortfall.

 

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Our Results of Operations for Fiscal 2012

The following table sets forth, for the periods indicated, selected items in our consolidated statements of income expressed as a percentage of total revenues:

 

Fiscal Years Ended

   January 28,
2012
    January 29,
2011
    January 30,
2010
 

Net sales

     97.4     96.7     96.7

Royalty income

     2.6     3.3     3.3
  

 

 

   

 

 

   

 

 

 

Total revenues

     100.0     100.0     100.0

Cost of sales

     67.0     64.3     67.0
  

 

 

   

 

 

   

 

 

 

Gross profit

     33.0     35.7     33.0

Selling, general and administrative expenses

     25.4     27.8     26.6

Depreciation and amortization

     1.4     1.5     1.8

Impairment on long-lived assets

     0.6     0.0     0.0
  

 

 

   

 

 

   

 

 

 

Operating income

     5.6     6.3     4.6

Costs on early extinguishment of debt

     0.1     0.1     0.0

Interest expense

     1.6     1.7     2.3
  

 

 

   

 

 

   

 

 

 

Net income before income taxes

     3.9     4.5     2.3

Income tax provision

     1.3     1.4     0.5
  

 

 

   

 

 

   

 

 

 

Net income

     2.6     3.1     1.8

Net income attributable to noncontrolling interest

     0.0     0.1     0.0
  

 

 

   

 

 

   

 

 

 

Net income attributable to Perry Ellis International, Inc.

     2.6     3.1     1.7
  

 

 

   

 

 

   

 

 

 

 

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The following tables sets forth, for the periods indicated, selected financial data expressed by segments:

 

Fiscal Years Ended

   January 28,
2012
    January 29,
2011
    January 30,
2010
 
           (in thousands)        

Revenues by segment:

      

Men’s Sportswear and Swim

   $ 718,721      $ 677,481      $ 654,623   

Women’s Sportswear

     164,298        26,119        21,251   

Direct-to-Consumer

     72,530        60,284        53,343   

Licensing

     25,043        26,404        24,985   
  

 

 

   

 

 

   

 

 

 

Total revenues

   $ 980,592      $ 790,288      $ 754,202   
  

 

 

   

 

 

   

 

 

 

Operating income by segment:

      

Men’s Sportswear and Swim

   $ 38,276      $ 36,089      $ 30,819   

Women’s Sportswear

     5,848        (4,582     (10,434

Direct-to-Consumer

     (5,273     (4,188     (6,917

Licensing

     16,534        22,519        21,395   
  

 

 

   

 

 

   

 

 

 

Total operating income

   $ 55,385      $ 49,838      $ 34,863   

EBITDA by segment:

      

Men’s Sportswear and Swim

   $ 47,304      $ 45,868      $ 41,707   

Women’s Sportswear

     7,260        (4,360     (10,142

Direct-to-Consumer

     (2,554     (2,375     (4,938

Licensing

     17,048        22,916        21,861   
  

 

 

   

 

 

   

 

 

 

Total EBITDA

   $ 69,058      $ 62,049      $ 48,488   
  

 

 

   

 

 

   

 

 

 

EBITDA margin by segment

      

Men’s Sportswear and Swim

     6.6     6.8     6.4

Women’s Sportswear

     4.4     -16.7     -47.7

Direct-to-Consumer

     -3.5     -3.9     -9.3

Licensing

     68.1     86.8     87.5

Total EBITDA margin

     7.0     7.9     6.4

For EBITDA reconciliation see “Item 6. Selected Financial Data.”

The following is a discussion of our results of operations for the fiscal year ended January 28, 2012 (“fiscal 2012”) as compared with the fiscal year ended January 29, 2011 (“fiscal 2011”) and fiscal 2011 compared with the fiscal year ended January 30, 2010 (“fiscal 2010”).

Our fiscal 2012 results as compared to our fiscal 2011 results

Net sales. Men’s Sportswear and Swim net sales in fiscal 2012 were $718.7 million, an increase of $41.2 million, or 6.1%, from $677.5 million in fiscal 2011. Net sales increases came primarily from our golf and Perry Ellis products, partially offset by decreases in our bottoms business.

Women’s Sportswear net sales in fiscal 2012 were $164.3 million, an increase of $138.2 million, or 529.5%, from $26.1 million in fiscal 2011. Net sales increased primarily due to the addition of the Rafaella business, which accounted for $123.3 million of the increase.

Direct-to-consumer net sales in fiscal 2012 were $72.5 million, an increase of $12.2 million, or 20.2%, from $60.3 million in fiscal 2011. The primary reason for the increase is our store expansion and our e-commerce platform growth.

Royalty income. Licensing royalty income in fiscal 2012 was $25.0 million, a decrease of $1.4 million, or 5.3%, from $26.4 in fiscal 2011. The decrease was primarily driven by the transition of our businesses in dress shirts, small leather goods, and Munsingwear corporate from licensing to wholesale, partially offset by royalty income from new license agreements including a fragrance license for Laundry by Shelli Segal. Approximately 83.4% of our royalty income was attributed to guaranteed minimum royalties with the balance attributable to royalty income in excess of guaranteed minimums for fiscal 2012.

 

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Gross profit. Gross profit was $323.7 million in fiscal 2012, an increase of $41.2 million, or 14.6%, from $282.5 million in fiscal 2011. This increase is primarily attributable to our increase in revenue as described above.

Gross profit margin. As a percentage of total revenue, gross profit margins were 33.0% in fiscal 2012, as compared to 35.7% in fiscal 2011, a decrease of 270 basis points. The decrease in the gross profit margin was partially due to the lower margin associated with our women’s businesses including Rafaella. We also had substantially higher levels of promotional activity in our Perry Ellis sportswear product assortments. Additionally, the conversion of the licensed business to wholesale, as described above, caused the gross profit margin to decline due to the decrease of the higher margin licensing business as a percentage of total revenue mix. Those decreases were partially offset by higher gross profit margins in businesses such as direct-to-consumer and international, which carry higher gross profit margins.

Selling, general and administrative expenses. Selling, general and administrative expenses in fiscal 2012 were $248.6 million, an increase of $28.6 million, or 13.0%, from $220.0 million in fiscal 2011. The increase was partially attributable to the new Rafaella business, which accounted for approximately $16.1 million. Additional increases resulted from the expansion of the retail stores, distribution costs from our increased volumes due to our revenue growth and increases in advertising and marketing expenditures. This increase was partially offset by reductions of $4.4 million in our compensation plans.

Men’s Sportswear and Swim EBITDA margin in fiscal 2012 decreased 20 basis points to 6.6%, from 6.8% in fiscal 2011. The EBITDA margin was negatively impacted by the reduction in gross profit margin, which was attributable to higher levels of promotional activity in our Perry Ellis sportswear collection business, partially offset by higher gross profit margins in our golf lifestyle business and leverage from selling, general and administrative expenses.

Women’s Sportswear EBITDA margin in fiscal 2012 increased to 4.4%, from (16.7)% in fiscal 2011. The EBITDA margin increased due to synergies achieved from the addition of Rafaella.

Direct-to-Consumer EBITDA margin in fiscal 2012 increased 40 basis points to (3.5)%, from (3.9)% in fiscal 2011. The increase is primarily attributable to the expansion of gross profit margin as described above.

Licensing EBITDA margin in fiscal 2012 decreased to 68.1%, from 86.8% in fiscal 2011. The decrease is primarily related to an impairment of $4.6 million on long-lived assets.

Depreciation and amortization. Depreciation and amortization in fiscal 2012 was $13.7 million, an increase of $1.5 million, or 12.3%, from $12.2 million in fiscal 2011. The increase is primarily attributed to the amortization of $1.0 million associated with the customer list acquired during the Rafaella acquisition; partially offset by a decrease in depreciation and amortization attributed to the reduction in capital expenditures over the last two years and the closure of several retail locations. As of January 28, 2012, we owned approximately $151.9 million of property, plant and equipment, at cost, as compared to approximately $138.1 million as of January 29, 2011, at cost.

Impairment on long-lived assets. During the fourth quarter of fiscal 2012, we recorded a $6.0 million impairment charge to reduce the net carrying value of certain long-lived assets and real property. As a result of our annual impairment analysis, during fiscal 2012, we recorded trademark impairment charges of $4.6 million, due to decreases in our projected revenues for certain brands. The impairments result from a decline in the future anticipated cash flows from these trademarks, which is due, in part, to the current economic challenges and market conditions in the apparel industry. Also during fiscal 2012, we recorded a $1.4 million impairment charge to reduce the net carrying value of certain long-lived assets (real property) to their estimated fair value. During fiscal 2011, we recorded an impairment charge to reduce the net carrying value of certain long-lived assets (leaseholds) to their estimated fair value in the amount of $0.4 million.

Costs on early extinguishment of debt. During the first quarter of fiscal 2012, we retired our 8 7/8% senior subordinated notes payable in the amount of $104.3 million with the proceeds of our new 7 7/8% senior subordinated notes due 2019. In connection with this retirement, we paid an additional $1.5 million in fees and

 

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premiums. We wrote-off approximately $853,000 in unamortized discount and bond fees associated with the 8 7/8% senior subordinated notes. Additionally, we wrote off the remaining premium that was associated with the termination of the swap that occurred during fiscal 2011 in the amount of $1.1 million. The 8 7/8% senior subordinated notes were scheduled to mature on September 15, 2013. During fiscal 2011, we retired $25.0 million of our 8  7/8% senior subordinated notes payable. In connection with this retirement, we paid an additional $453,000 in fees and premiums. Additionally we wrote-off approximately $277,000 in unamortized discount and bond fees associated with the retired portion of the 8  7/8% senior subordinated notes.

Interest expense. Interest expense in fiscal 2012 was $16.1 million, an increase of $2.9 million, or 22.0%, from $13.2 million in fiscal 2011. The overall increase in interest expense is primarily attributable to the higher balance of our 7 7/8% senior subordinated notes and the higher average balance on our senior credit facility, primarily due to the financing of the acquisition of Rafaella. In addition, the 8 7/8% senior subordinated notes and the 7 7/8% senior subordinated notes were outstanding simultaneously for about one month during the year ended January 28, 2012, causing us to have approximately $0.7 million in redundant interest expense.

Income taxes. The income tax provision for fiscal 2012 was $12.5 million, a $1.1 million increase as compared to $11.4 million for fiscal 2011. For fiscal 2012, our effective tax rate was 32.8% as compared to 31.7% in fiscal 2011. The increase in the tax rate is attributed to a larger proportion of worldwide income generated in the U.S. as opposed to lower statutory rate foreign jurisdictions. See Notes to the Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data” for further details regarding taxable income by jurisdiction.

Net income attributed to Perry Ellis International, Inc. Net income in fiscal 2012 was $25.5 million, an increase of $1.4 million, or 5.8%, as compared to $24.1 million in fiscal 2011 as a result of the above-mentioned factors.

Our fiscal 2011 results as compared to our fiscal 2010 results

Net sales. Men’s Sportswear and Swim net sales in fiscal 2011 were $677.5 million, an increase of $22.9 million, or 3.5%, from $654.6 million in fiscal 2010. Net sales increased primarily due to increased sales in the Perry Ellis apparel, golf and accessories businesses.

Women’s Sportswear net sales in fiscal 2011 were $26.1 million, an increase of $4.8 million, or 22.5%, from $21.3 million in fiscal 2010. The increase is primarily attributable to an expansion of Laundry by Shelli Segal.

Direct-to-consumer net sales in fiscal 2011 were $60.3 million, an increase of $7.0 million, or 13.1%, from $53.3 million in fiscal 2010. The primary reason for the increase is an increase in same store sales. Additional increases came from our store expansion and our e-commerce platform growth.

Royalty income. Licensing royalty income in fiscal 2011 was $26.4 million, an increase of $1.4 million, or 5.6%, from $25.0 in fiscal 2010. Royalty income increased reflecting new licenses signed during the first half of fiscal 2011 for our Laundry brands as well as from our new fragrance license for Original Penguin, and organic growth in our current licenses, which was partially offset by the non-renewal of licenses associated with our Ping golf business given its exit, and our Munsingwear corporate license business, which we brought in-house during the second half of fiscal 2011. Approximately 87.7% of our royalty income was attributable to guaranteed minimum royalties with the balance attributable to royalty income in excess of the guaranteed minimums for fiscal 2011.

Gross profit. Gross profit was $282.5 million in fiscal 2011, an increase of $33.4 million, or 13.4%, from $249.1 million in fiscal 2010. This increase is primarily attributable to our increase in revenue as described above.

Gross profit margin. As a percentage of total revenue, gross profit margins were 35.7% in fiscal 2011, as compared to 33.0% in fiscal 2010, an increase of 271 basis points. The increase in the gross profit percentage was attributed to the margin expansion of Perry Ellis men’s apparel and accessories, the exit of lower margin mass market private label programs and a prior golf license and the improved margin in our contemporary women’s and Original Penguin businesses, as well as, the addition of the new Callaway business.

 

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Selling, general and administrative expenses. Selling, general and administrative expenses in fiscal 2011 were $220.0 million, an increase of $19.6 million, or 9.8%, from $200.4 million in fiscal 2010. As a percentage of total revenues, selling, general and administrative expenses increased to 27.8% in fiscal 2011 as compared to 26.6% in fiscal 2010, which was in line with our expectations. The increase, primarily in our wholesale business, reflects additional promotions and advertising investment in our core brands along with new brands – this includes celebrity endorsements, social media, print advertising as well as promotional events. We believe these investments are integral to building and supporting the brand images in order to complement the superior quality and value of product they bring to the end consumer. Increases were also reflected in investment in our employees through salary increases as well as bonus plans that rewarded improving profitability performance across most of our businesses. Additionally, expenses increased because of our expansion into our new wholesale brands, such as Callaway. We also incurred approximately $2.2 million of expense related to the acquisition of Rafaella.

Men’s Sportswear and Swim EBITDA margin in fiscal 2011 increased 40 basis points to 6.8%, from 6.4% in fiscal 2010. Increases in gross profit margin percentage and EBITDA margin were attributable to margin expansion of Perry Ellis men’s apparel and accessories and the exit of lower margin mass market private label programs, offset by increases in our marketing expenditures and investments in our personnel.

Women’s Sportswear and Swim EBITDA margin in fiscal 2011 increased to (16.7)%, from (47.7)% in fiscal 2011. This improvement was primarily due to expansion in our gross profit margins driven by improved product performance as well as controlled expenditures.

Direct-to-Consumer EBITDA margin in fiscal 2011 increased 540 basis points to (3.9)%, from (9.3)% in fiscal 2010. Gross profit margin expansion was driven by stronger store level margins from improved product assortment as well as leverage of store expenses.

Licensing EBITDA margin in fiscal 2011 decreased 70 basis points to 86.8%, from 87.5% in fiscal 2010. EBITDA margin declined due to increases in marketing expense.

Depreciation and amortization. Depreciation and amortization in fiscal 2011 was $12.2 million, a decrease of $1.4 million, or 10.3%, from $13.6 million in fiscal 2010. The decrease in depreciation and amortization is attributed to the reduction in capital expenditures over the last two years and the closure of several retail locations. As of January 29, 2011, we owned approximately $138.1 million of property, plant and equipment, at cost, as compared to approximately $132.3 million as of January 30, 2010, at cost.

Impairment on long-lived assets. During the fourth quarter of fiscal 2011, we experienced lower-than-expected performance at certain locations, which was due in part to the economic downturn. As a result, we recorded a $0.4 million impairment charge to reduce the net carrying value of certain long-lived assets (primarily leaseholds) at these locations to their estimated fair value. During fiscal 2010, we recorded a similar impairment charge to reduce the net carrying value of certain long-lived assets (primarily leaseholds) to their estimated fair value in the amount of $0.3 million.

Costs on early extinguishment of debt. During the second quarter of fiscal 2011, we retired $25.0 million of our senior subordinated notes payable. In connection with this retirement, we paid an additional $453,000 in fees and premiums. Additionally we wrote-off approximately $277,000 in unamortized discount and bond fees associated with the retired portion of the senior subordinated notes. During the fourth quarter of fiscal 2010, we retired $20.8 million of our senior subordinated notes payable. In connection with this retirement, we paid an additional $98,000 in fees and premiums. Additionally we wrote-off approximately $259,000 in unamortized discount and bond fees, associated with the retired portion of the senior subordinated notes.

Interest expense. Interest expense in fiscal 2011 was $13.2 million, a decrease of $4.2 million, or 24.1%, from $17.4 million in fiscal 2010. We ended fiscal 2011 with borrowings in the amount of $97.3 million on our

 

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senior credit facility as compared to no borrowings as of the end of fiscal 2010. The increase in borrowings is primarily attributed to the Rafaella acquisition that occurred during January 2011. The overall decrease in interest expense is primarily attributable to the lower average balance on our senior credit facility and senior subordinated notes payable as compared to the comparable prior year period.

Income taxes. The income tax provision for fiscal 2011 was $11.4 million, a $7.8 million increase as compared to a $3.6 million expense for fiscal 2010. For fiscal 2011, our effective tax rate was 31.7% as compared to 21.1% in fiscal 2010. The increase in the tax rate is attributed to a larger proportion of worldwide income generated in the U.S. as opposed to lower statutory rate foreign jurisdictions as well as an increase in permanent nondeductible items. See Notes to the Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data” for further details regarding taxable income by jurisdiction.

Net income attributed to Perry Ellis International, Inc. Net income in fiscal 2011 was $24.1 million, an increase of $10.9 million, or 82.6%, as compared to $13.2 million in fiscal 2010 as a result of the above-mentioned factors.

Our Liquidity and Capital Resources

We rely principally on cash flow from operations and borrowings under our senior credit facility to finance our operations, acquisitions and capital expenditures; and to a lesser extent, on letter of credit facilities for the acquisition of a small portion of our inventory purchases. We believe that our working capital requirements will decrease for next year driven primarily by lower levels of inventory. As of January 28, 2012, our total working capital was $289.9 million as compared to $248.6 million as of January 29, 2011. During the third quarter of fiscal 2011, a $3.6 million letter of credit facility was cancelled in connection with the termination of our Canadian joint venture. We have shifted most of our inventory financing strategy from relying on letter of credit facilities to direct trade terms with our vendors, and as such, we did not need the excess capacity provided by this letter of credit facility. We believe that our cash flows from operations and availability under our senior credit facility and remaining letter of credit facilities are sufficient to meet our working capital needs. We also believe that our real estate assets, which had a net book value of $23.9 million at January 28, 2012, have a higher market value. These real estate assets may provide us with additional capital resources. Additional borrowings against these real estate assets, however, would be subject to certain loan to value criteria established by lending institutions. As of January 28, 2012, we had mortgage loans on these properties totaling $25.8 million.

During March 2011, we sold 2.0 million shares of our common stock at a price to the public of $28.00 per share and an underwriting discount of $1.40 per share, resulting in net proceeds to us after offering expenses of $52.9 million. We used the net proceeds from the common stock offering to repay a portion of the amounts outstanding under our senior credit facility.

Additionally, in March 2011, we sold $150 million in aggregate principal amount of our 7 7/8% senior subordinated notes due 2019 at a price to the public of 100.00% of par, an underwriting discount of 2.0% and other transaction costs, resulting in aggregate net proceeds to us of $146.5 million. We used the net proceeds of the senior subordinated notes offering first to redeem our outstanding 8  7/8% senior subordinated notes due 2013 at a redemption price of 101.4792% of the outstanding principal amount, plus accrued and unpaid interest, and the remaining net proceeds to repay a portion of the amounts outstanding under our senior credit facility.

Net cash provided by operating activities was $0.7 million in fiscal 2012 as compared to cash provided by operating activities of $21.0 million in fiscal 2011 and cash provided by operating activities of $88.8 million in fiscal 2010.

The decrease of $20.3 million in the level of cash from operating activities in fiscal 2012 as compared to fiscal 2011 is primarily attributable to an increase in account receivable of $16.3 million as compared to a decrease of accounts receivable of $14.4 million during the same period in fiscal 2011. The increase was the result of increased shipments and revenues during the fourth quarter. Additionally, there were decreases in operating cash flows attributed to an increase in inventory of $22.8 million, an increase in other assets and prepaid taxes of $3.5 million, and a decrease in accounts payable and accrued expenses of $1.9 million. As a result of the increase in inventory, for fiscal 2012, our inventory turnover ratio decreased to 3.3 as compared to 3.8 for fiscal 2011.

 

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The decrease of $67.8 million in the level of cash from operating activities in fiscal 2011 as compared to fiscal 2010 is primarily attributable to an increase of inventory of $43.1 million as compared to a decrease of inventory of $28.1 million during the same period in fiscal 2011. In line with our expectations, we strategically purchased inventory to secure pricing and capacity which resulted in a 38% increase of inventory as compared to fiscal 2010. The increase was the result of our actions to accelerate the receipt of goods in anticipation of possible priced increases. As a result of this increase in inventory, for fiscal 2011, the inventory turnover ratio decreased to 3.8 as compared to 4.7 for fiscal 2010. Additionally, there were increases in operating cash flows attributed to the decrease in accounts receivable of $14.4 million due to an increase in collection efforts despite the increase in sales toward the end of the fourth quarter, an increase in accounts payable and accrued expenses of $6.7 million, offset by an decrease of $5.2 million in unearned revenues and other liabilities.

Net cash used in investing activities was $2.3 million in fiscal 2012, which primarily reflects the purchase of property and equipment in the amount of $13.1 million, offset by the utilization of restricted cash collateralizing letters of credit in the amount of $9.4 million acquired in the Rafaella acquisition and the proceeds of $2.9 million from the sale of intangible assets. Net cash used in investing activities was $94.5 million in fiscal 2011, primarily reflecting the acquisition of the Rafaella brands and working capital for $75.4 million, the proceeds related to the purchase price adjustment of $4.5 million, the purchases of property and equipment of $6.2 million and the establishment of restricted cash as collateral for letters of credits assumed during the Rafaella acquisition of $9.4 million, partially offset by the proceeds received in the amount of $1.1 million from the sale of an intangible asset during fiscal 2010. Net cash used in investing activities was $2.0 million in fiscal 2010, primarily reflecting the purchases of property and equipment of $2.7 million, partially, offset by the proceeds received in the amount of $0.7 million from the sale of an intangible asset for a total sales price of $1.8 million of which the balance was collected during fiscal 2011. We anticipate capital expenditures during fiscal 2013 of $10.0 million to $12.0 million in technology, systems, retail stores, and other expenditures.

Net cash provided by financing activities in fiscal 2012 was $7.0 million, which reflects net proceeds from the issuance of our new 7 7/8% senior subordinated notes in the amount of $146.5 million, the net proceeds from our stock offering in the amount of $52.9 million, proceeds from exercises of stock options of $4.8 million, a tax benefit from the exercise of stock options of $1.3 million, partially offset by net payments on our senior credit facility of $75.7 million, the retirement of our 8 7/8% senior subordinated notes in the amount of $105.8 million and the purchase of treasury stock of $16.0 million. Net cash provided by financing activities in fiscal 2011 was $73.6 million, which primarily reflects the net borrowings on our senior credit facility of $97.3 million, which were used primarily to finance the Rafaella acquisition, proceeds from exercises of stock options of $2.7 million, a tax benefit from the exercise of stock options of $2.3 million and the proceeds from our new mortgage loan in the amount of $13.0 million, offset by the payment for the noncontrolling interest in our Canadian joint venture of $4.6 million and payments of $11.5 million on our mortgages and capital leases. Additionally, we repurchased senior subordinated notes in the amount of $25.5 million, including redemption premiums and commissions of $0.5 million. Net cash used in financing activities in fiscal 2010 was $77.0 million, which primarily reflects the net payments on our senior credit facility of $54.4 million, the repurchase of senior subordinated notes in the amount of $20.8 million, including redemption premiums and commissions of $0.1 million, the payments of $0.5 million on our mortgages, and the purchase of treasury stock of $1.8 million, partially offset by the proceeds received from the exercise of stock options of $0.6 million and $0.2 million in tax benefit from the exercise of those options.

During fiscal 2010, our Board of Directors authorized us to purchase, from time to time and as market and business conditions warranted, our 8 7/8% senior subordinated notes for cash in the open market or in privately negotiated transactions. The amount of senior subordinated notes could be repurchased or otherwise retired, if any, would be based on parameters approved by the Board of Directors and would depend on market conditions, trading levels of our senior subordinated notes, our cash position and other considerations. During fiscal 2011 and 2010, we repurchased $25.0 million and $20.8 million, respectively. On March 8, 2011, the senior subordinated notes in the amount of $104.3 million due September 15, 2013 were called and subsequently retired from the proceeds of our newly issued 7 7/8% Senior Subordinated Notes due 2019.

 

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In September 2010, our Board of Directors extended our stock repurchase program, which authorized us to repurchase up to $20 million of our common stock for cash over the next twelve months. Although our Board of Directors allocated a maximum of $20 million to carry out the program, we were not obligated to purchase any specific number of outstanding shares.

In November 2011, our Board of Directors extended and increased the stock repurchase program, which now authorizes us to repurchase up to $40 million of our common stock for cash over the next twelve months. Although our Board of Directors allocated a maximum of $40 million to carry out the program, we are not obligated to purchase any specific number of outstanding shares and will reevaluate the program on an ongoing basis.

During September 2011, our Board of Directors authorized the retirement of 2,462,196 shares of treasury stock, which were recorded at a cost of approximately $17.4 million on the consolidated balance sheets. Accordingly, we reduced common stock and additional paid-in-capital by $25,000 and $17.4 million, respectively. Additionally, we repurchased shares of our commons stock during the fourth quarter of fiscal 2012 at a cost of approximately $16.0 million. We did not repurchase any shares of our common stock during fiscal 2011. Total purchases under the plan as of January 28, 2012 were $33.4 million.

Acquisitions

On January 28, 2011, we completed the acquisition of substantially all of the assets of Rafaella Apparel Group, Inc. (“Rafaella”), Rafaella Apparel Far East Limited (“Rafaella Far East”) and Verrazano, Inc. (“Verrazano”) pursuant to the Asset Purchase Agreement dated as of January 7, 2011 (the “Agreement”) by and among Rafaella, Rafaella Far East and Verrazano (collectively, the “Sellers”) and the Company.

At January 28, 2011, the initial consideration paid by us totaled $80 million in cash and a warrant to purchase 106,565 shares of our common stock valued at approximately $2.6 million. During fiscal 2012, the cash portion of the purchase price was adjusted as set forth in the Agreement based on a post-closing true-up of net working capital, which resulted in cash paid by us totaling $75.4 million. We funded the acquisition through our senior credit facility, including a $25 million exercise of the accordion feature under the credit facility.

The warrant issued to Rafaella as part of the purchase price became exercisable on the business day immediately following the first business day after the closing on which the closing price of the our common stock equaled or exceeded $28.152 and expires two years following the closing date. The warrant is exercisable for a total of 106,565 shares of the Company’s common stock at an exercise price of $.01 per share. The exercise price per share and number of shares issuable upon exercise are subject to adjustments for stock splits, dividends, subdivisions or combinations involving our common stock. As of January 28, 2012, the warrant had not been exercised.

Senior Credit Facility

On December 2, 2011, we amended and restated our existing senior credit facility (the “Credit Facility”), with Wells Fargo Bank, National Association, as agent for the lenders, and Bank of America, N.A., as syndication agent. The Credit Facility provides a revolving credit facility of up to an aggregate amount of $125 million, subject to increases from time to time in increments of $25 million up to a maximum of $200 million. The Credit Facility has a five-year term that expires December 2, 2016. At January 28, 2012 and January 29, 2011, we had outstanding borrowings of $21.7 million and $97.3 million, respectively, under the Credit Facility.

Certain Covenants. The Credit Facility contains certain financial and other covenants, which, among other things, require us to maintain a minimum fixed charge coverage ratio if availability falls below certain thresholds. We are not aware of any non-compliance with any of our covenants in this Credit Facility. These covenants may restrict our ability and the ability of our subsidiaries to, among other things, incur additional indebtedness and liens in certain circumstances, redeem or repurchase capital stock, make certain investments or sell assets. We may pay cash dividends subject to certain restrictions set forth in the covenants including, but not limited to, meeting a minimum excess availability threshold and no occurrence of default. We could be materially harmed if we violate any covenants, as the lenders under the Credit Facility could declare all amounts

 

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outstanding, together with accrued interest, to be immediately due and payable. If we are unable to repay those amounts, the lenders could proceed against the assets of ours and our subsidiaries that are borrowers or guarantors. In addition, a covenant violation that is not cured or waived by the lenders could also constitute a cross-default under certain of our other outstanding indebtedness, such as the indenture relating to our 7 7/8% senior subordinated notes due April 1, 2019, our letter of credit facilities, or our real estate mortgage loans. Such a cross-default could result in all of our debt obligations becoming immediately due and payable, which we may not be able to satisfy.

Borrowing Base. Borrowings under the Credit Facility are limited to a borrowing base calculation, which generally restricts the outstanding balance to the sum of (a) 87.5% of eligible receivables plus (b) 87.5% of eligible foreign accounts up to $1.5 million plus (c) the lesser of (i) the inventory loan limit, which equals 80% of the maximum credit under the Credit Facility at the time, (ii) 70.0% of eligible finished goods inventory, or (iii) 90.0% of the net recovery percentage (as defined in the Credit Facility) of eligible inventory.

Interest. Interest on the outstanding principal balance drawn under the Credit Facility accrues, at our option, at either (a) the greater of the agent’s prime lending rate plus a margin of 1.25% per year through March 31, 2012, provided such margin shall be adjusted quarterly thereafter, or the Federal Funds rate in effect on such day plus one half of one percent (.50%); or (b) the rate quoted by the agent as the Eurodollar Rate for one-, two- or three-month Eurodollar deposits, as selected by us, plus a margin of 2.25% per year through March 31, 2012. Thereafter, the margin adjusts quarterly, in a range of 1.75% to 2.50%, based on our previous quarterly average of excess availability plus excess cash on the last day of the previous quarter.

Security. As security for the indebtedness under the Credit Facility, we granted to the lenders a first priority security interest (subject to liens permitted under the Credit Facility to be senior thereto) in substantially all of the existing and future assets, including, without limitation, accounts receivable, inventory, deposit accounts, general intangibles, equipment and capital stock or membership interests, as the case may be, of certain subsidiaries, and real estate but excluding our non-U.S. subsidiaries and all of our trademark portfolio.

Letter of Credit Facilities

As of January 28, 2012, we maintained two U.S. dollar letter of credit facilities totaling $55.1 million and one letter of credit facility totaling $0.2 million utilized by our United Kingdom subsidiary. Each documentary letter of credit is secured primarily by the consignment of merchandise in transit under that letter of credit and certain subordinated liens on our assets.

During the third quarter of fiscal 2012, we increased one of our two U.S. dollar letters of credit from $10.0 million to $15.0 million, under existing terms and reduced the letter of credit facility utilized by our United Kingdom subsidiary from $1.0 million to $0.2 million. During the third quarter of fiscal 2011, because of the termination of our Canadian joint venture, we cancelled the letter of credit facility utilized by our Canadian joint venture which totaled an estimated $3.6 million. As of January 28, 2012 and January 29, 2011, there was $50.8 million and $45.1 million, respectively, available under the existing letter of credit facilities.

Additionally, we assumed certain letters of credit in the amount of $9.4 million in connection with the acquisition of certain net assets from Rafaella Apparel Group, Inc. These letters of credit were fully collateralized by restricted cash in the amount of $9.4 million and were fully utilized during fiscal 2012. As of January 28, 2012, there was no restricted cash related to these letters of credit compared to a balance of $9.4 million as of January 29, 2011.

8  7/8% $150 Million Senior Subordinated Notes Payable

In fiscal 2004, we issued $150 million 8 7/8% senior subordinated notes, due September 15, 2013. The proceeds of this offering were used to redeem previously issued $100 million 12 1/4% senior subordinated notes and to pay down the outstanding balance of the senior credit facility at that time. The proceeds to us were $146.8 million yielding an effective interest rate of 9.1%.

 

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Certain Covenants. The indenture governing the senior subordinated notes contained certain covenants which restricted our ability and the ability of our subsidiaries to, among other things, incur additional indebtedness in certain circumstances, redeem or repurchase capital stock, make certain investments, or sell assets. We were prohibited from paying cash dividends under these covenants.

During the fourth quarter of fiscal 2010, we retired $20.8 million of our senior subordinated notes payable. In connection with this retirement, we paid an additional $98,000 in redemption premiums and commissions. Additionally, we wrote-off approximately $259,000 in unamortized discount and bond fees associated with the retired portion of our senior subordinated notes.

During June 2010, we retired $25.0 million of our senior subordinated notes payable. In connection with this retirement, we paid an additional $453,000 in redemption premiums and commissions. Additionally, we wrote-off approximately $277,000 in unamortized discount and bond fees associated with the retired portion of our senior subordinated notes.

On March 8, 2011, the senior subordinated notes due September 15, 2013 were called and subsequently retired by the issuance of new notes more fully described herein. In connection with the call, we incurred an early call premium of $1.5 million. We also wrote-off the remaining unamortized discount and bond fees associated with the senior subordinated notes.

7 7/8% $150 Million Senior Subordinated Notes Payable

In March 2011, we issued $150 million 7 7/8% senior subordinated notes, due April 1, 2019. The proceeds of this offering were used to retire the $150 million 8 7/8% senior subordinated notes due September 15, 2013 and to repay a portion of the senior credit facility. The proceeds to us were $146.5 million yielding an effective interest rate of 8.0%.

Certain Covenants. The indenture governing the senior subordinated notes contains certain covenants which restrict our ability and the ability of our subsidiaries to, among other things, incur additional indebtedness in certain circumstances, pay dividends or make other distributions on, redeem or repurchase capital stock, make investments or other restricted payments, create liens on assets to secure debt, engage in transactions with affiliates, and effect a consolidation or merger. We are not aware of any non-compliance with any of our covenants in this indenture. We could be materially harmed if we violate any covenants because the indenture’s trustee could declare the outstanding notes, together with accrued interest, to be immediately due and payable, which we may not be able to satisfy. In addition, a violation could also constitute a cross-default under the senior credit facility, the letter of credit facilities and the real estate mortgages resulting in all of our debt obligations becoming immediately due and payable, which we may not be able to satisfy.

Real Estate Mortgage Loans

In fiscal 2003, we acquired our main administrative office, warehouse and distribution facility in Miami and partially financed the acquisition of the facility with an $11.6 million mortgage loan. Interest was fixed at 7.123%. In August 2008, we executed a maturity extension of the real estate mortgage loan until July 1, 2010. In July 2010, we paid off the then existing real estate mortgage loan and refinanced our main administrative office, warehouse and distribution facility in Miami with a $13.0 million mortgage loan. The loan is due on August 1, 2020. Principal and interest of $83,000 were due monthly based on a 25 year amortization with the outstanding principal due at maturity. Interest was fixed at 5.80%. In October 2011, we amended the mortgage agreement to modify the interest rate. The interest rate was reduced to 5.00% per annum and the terms were restated to reflect new monthly payments of principal and interest of $77,000 based on a 25 year amortization with the outstanding principal due at maturity. At January 28, 2012, the balance of the real estate mortgage loan totaled $12.4 million, net of discount, of which $262,000 is due within one year.

In June 2006, we entered into a mortgage loan for $15 million secured by our Tampa facility. The loan is due on June 7, 2016. Principal and interest of $297,000 were due quarterly based on a 20 year amortization with the outstanding principal due at maturity. Interest was set at 6.25% for the first five years, at which point it would have reset based on the terms and conditions of the promissory note. In June 2010, we negotiated with the bank to accelerate the rate reset that was scheduled to occur in June 2011, and the interest rate was reduced to 5.75% per

 

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annum, among other changes to the loan. In October 2011, we amended the mortgage agreement to modify the interest rate. The interest rate was reduced to 4.95% per annum and the terms were restated to reflect new quarterly payments of principal and interest of $268,000, based on a 20 year amortization with the outstanding principal due at maturity. At January 28, 2012, the balance of the real estate mortgage loan totaled $13.4 million, net of discount, of which $402,000 is due within one year.

The real estate mortgage loans contain certain covenants. We are not aware of any non-compliance with any of these covenants. If we violate any covenants, the lender under the real estate mortgage loan could declare all amounts outstanding thereunder to be immediately due and payable, which we may not be able to satisfy. A covenant violation could also constitute a cross-default under our senior credit facility, the letter of credit facilities and indenture relating to our senior subordinated notes resulting in all our debt obligations becoming immediately due and payable, which we may not be able to satisfy.

Contractual Obligations and Commercial Contingent Commitments

The following tables illustrate the balance of our contractual obligations and commercial contingent commitments as of January 28, 2012:

 

     Payments Due by Period  
     (in thousands)  

Contractual Obligations

   Total      Less than
1 year
     1-3 years      4-5 years      After 5 years  

Long-term debt, net of interest

   $ 197,779       $ 664       $ 23,206       $ 12,841       $ 161,068   

Interest on long-term debt (1)

     84,435         13,064         26,172         25,592         19,607   

Operating leases

     74,204         18,449         24,332         18,828         12,595   

Capital leases

     236         195         36         5         —     

Pension liability

     17,326         3,866         7,901         3,385         2,174   

Royalty minimum guaranties

     16,596         6,650         9,946         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total contractual obligations

   $ 390,576       $ 42,888       $ 91,593       $ 60,651       $ 195,444   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

Includes interest payments based on contractual terms.

 

     Amount of Contingent Commitment Expiration Per Period  
     (in thousands)  

Other Commercial Contingent Commitments

   Total      Less than
1 year
     1-3 years      4-5 years      After 5 years  

Letters of credit

   $ 298       $ 298       $ —         $ —         $ —     

Standby letters of credit

     4,257         4,257         —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial commitments

   $ 4,555       $ 4,555       $ —         $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total contractual obligations and other commercial contingent commitments

   $ 395,131       $ 47,443       $ 91,593       $ 60,651       $ 195,444   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

At January 28, 2012, we had a liability for unrecognized tax benefits and an accrual for the payment of related interest and penalties totaling $1.4 million. Due to the uncertainties related to these tax matters, we are unable to make a reasonably reliable estimate when cash settlement with a taxing authority will occur in relation to these liabilities.

Off-Balance Sheet Arrangements

We are not a party to any “off-balance sheet arrangements,” as defined by applicable GAAP and SEC rules.

 

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Derivative Financial Instruments

Derivative financial instruments such as interest rate swap contracts and foreign exchange contracts are recognized in the financial statements and measured at fair value regardless of the purpose or intent for holding them. Changes in the fair value of derivative financial instruments are either recognized in income or stockholders’ equity (as a component of comprehensive income), depending on whether the derivative is not designated as a hedge or is designated as a hedge of changes in fair value or cash flows. When designated as a hedge of changes in fair value, the effective portion of the hedge is recognized as an offset in income with a corresponding adjustment to the hedged item. When designated as a hedge of changes in cash flows, the effective portion of the hedge is recognized as an offset in comprehensive income with a corresponding adjustment to the hedged item and recognized in income in the same period as the hedged item is settled. See “Item 7A – Quantitative and Qualitative Disclosures About Market Risk” for further discussion about derivative financial instruments.

Effects of Inflation and Foreign Currency Fluctuations

We do not believe that inflation or foreign currency fluctuations significantly affected our financial position and results of operations as of and for the fiscal year ended January 28, 2012.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

The market risk inherent in our financial statements represents the potential changes in the fair value, earnings or cash flows arising from changes in interest rates. 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 exposure, including interest rate.

Derivatives on $150 Million Senior Subordinated Notes Payable

In August 2009, we entered into an interest rate swap agreement (the “Swap Agreement”) for an aggregate notional amount of $75 million in order to reduce our debt servicing costs associated with our $150 million 8  7/8% senior subordinated notes. The Swap Agreement was scheduled to terminate on September 15, 2013. Under the Swap Agreement, we were entitled to receive semi-annual interest payments on September 15 and March 15 at a fixed rate of 8 7/8% and were obligated to make semi-annual interest payments on September 15 and March 15 at a floating rate based on the one-month LIBOR rate plus 632 basis points for the period through September 15, 2013. The Swap Agreement had an optional call provision that allowed the counterparty to settle the Swap Agreement at any time with 30 days notice and subject to declining termination premium payments from the counterparty in the event the call was exercised. The Swap Agreement was a fair value hedge as it had been designated against the 8 7/8% senior subordinated notes carrying a fixed rate of interest and converted the fixed interest payments to variable interest payments.

During August 2010, we were notified by the counterparty that it would exercise the optional call provision and terminate the Swap Agreement in September 2010. As per the terms of the call provision, we received $1.1 million, its fair value as of the termination date. The fair value of the hedge at the termination date was amortized over the remaining term of the 8 7/8% senior subordinated notes payable.

The Swap Agreement resulted in a decrease to interest expense of $1.3 million and $0.3 million for the years ended January 29, 2011 and January 30, 2010, respectively.

In August 2009, we entered into an interest rate cap agreement (the “$75 million Cap Agreement”) for an aggregate notional amount of $75 million associated with our 8 7/8% senior subordinated notes. The $75 million Cap Agreement became effective on December 15, 2010 and was scheduled to terminate on September 15, 2013. The $75 million Cap Agreement was being used to manage cash flow risk associated with our floating interest rate exposure pursuant to the Swap Agreement. The $75 million Cap Agreement did not qualify for hedge accounting treatment. The change in fair value resulted in an increase to interest expense of $1.4 million and $1.2 million for the years ended January 29, 2011 and January 30, 2010, respectively. The fair value of the $75 million Cap Agreement recorded on our consolidated balance sheet was $1.8 million for the year ended January 29, 2011. We terminated the $75 million Cap Agreement during March 2011. In connection with the termination, we paid $1.6 million.

 

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The table below provides information about the Company’s financial instruments that are sensitive to changes in interest rates:

 

Expected Maturity Date                                                 
Fiscal Years Ending                                                 
(In Millions)                                                 
     Less than 1  yr
2013
    1 - 3 yrs     4 - 5 yrs     After 5  yrs
Thereafter
    Total     Fair  Value
2012
 
       2014     2015     2016     2017        

Long-term Liabilities:

                

7  7/8% Senior Subordinated Notes Payable

   $ 0.0      $ 0.0      $ 0.0      $ 0.0      $ 0.0      $ 150.0      $ 150.0      $ 154.3   

Fixed Interest Rate

     7.88     7.88     7.88     7.88     7.88     7.88     7.88  

Real Estate Mortgage Loan

   $ 0.3      $ 0.3      $ 0.3      $ 0.3      $ 0.3      $ 11.1      $ 12.6      $ 12.6   

Fixed Interest Rate

     5.00     5.00     5.00     5.00     5.00     5.00     5.00  

Real Estate Mortgage Loan

   $ 0.4      $ 0.5      $ 0.4      $ 0.5      $ 11.7      $ 0.0      $ 13.5      $ 13.5   

Variable Interest Rate (A)

     4.95     4.95     4.95     4.95     4.95     4.95     4.95  

Senior Credit Facility

   $ 0.0      $ 21.7      $ 0.0      $ 0.0      $ 0.0      $ 0.0      $ 21.7      $ 21.7   

Average Variable Interest Rate (B)

     2.54     2.54     N/A        N/A        N/A        N/A        2.54  

 

(A) 

Real estate mortgage loan has a fixed rate for the first five years, at which point it will be reset based on the terms and conditions of the promissory note.

(B)

Senior credit facility has a variable rate of interest of either 1) the published prime lending rate or 2) Eurodollar rate with adjustments of both rates based on meeting certain financial conditions.

Commodity Price Risk

We are exposed to market risks for the pricing of cotton and other fibers, which may impact fabric prices. Fabric is a portion of the overall product cost, which includes various components. We manage our fabric prices by using a combination of different strategies including the utilization of sophisticated logistics and supply chain management systems, which allow us to maintain maximum flexibility in our global sourcing of products. This provides us with the ability to re-direct our sourcing of products to the most cost-effective jurisdictions. In addition, we may modify our product offerings to our customers based on the availability of new fibers, yield enhancement techniques and other technological advances that allow us to utilize more cost effective fibers. Finally, we also have the ability to adjust our price points of such products, to the extent market conditions allow. These factors, along with our foreign-based sourcing offices, allow us to procure product from lower cost countries or capitalize on certain tariff-free arrangements, which help mitigate any commodity price increases that may occur. We have not historically managed, and do not currently intend to manage, commodity price exposures by using derivative instruments.

Item 8. Financial Statements And Supplementary Data

See pages F-1 through F-51 appearing at the end of this report.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

 

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Item 9A. Controls and Procedures

Evaluation of Disclosure 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 Chairman of the Board and Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of January 28, 2012.

The purpose of disclosure controls is to ensure that information required to be disclosed in our reports filed with the SEC is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls are also designed with the objective of ensuring that such information is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, to allow timely decisions regarding required disclosure. The purpose of internal controls over financial reporting is to provide reasonable assurance that our transactions are properly authorized, our assets are safeguarded against unauthorized or improper use and our transactions are properly recorded and reported to permit the preparation of our financial statements in conformity with generally accepted accounting principles.

Our management does not expect that our disclosure controls or our internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable rather than absolute assurance that the objectives of the control system are met. The design of a control system must also reflect the fact that there are resource constraints, with the benefits of controls considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud (if any) within the company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that simple errors or mistakes can occur. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

Our internal controls are evaluated on an ongoing basis by our internal audit function and by other personnel in our organization. The overall goals of these various evaluation activities are to monitor our disclosure and internal controls and to make modifications as necessary, as disclosure and internal controls are intended to be dynamic systems that change (including improvements and corrections) as conditions warrant. Part of this evaluation is to determine whether there were any significant deficiencies or material weaknesses in our internal controls, or whether we had identified any acts of fraud involving personnel who have a significant role in our internal controls. Significant deficiencies are control issues that could have a significant adverse effect on the ability to record, process, summarize and report financial data in the financial statements. Material weaknesses are particularly serious conditions where the internal control does not reduce to a relatively low level the risk that misstatements caused by error or fraud may occur in amounts that would be material in relation to the financial statements and not be detected within a timely period by employees in the normal course of performing their assigned functions.

Based upon this evaluation, our Chairman of the Board and Chief Executive Officer and our Chief Financial Officer concluded that, subject to the limitations noted above, our disclosure controls and procedures were effective as of January 28, 2012 in ensuring that the information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

 

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MANAGEMENT’S REPORT ON INTERNAL CONTROL

April 12, 2012

To the Stockholders of Perry Ellis International, Inc.

Management of Perry Ellis International is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed by, or under the supervision of, our principal executive and principal financial officers and effected by our board of directors, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:

 

   

pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;

 

   

provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and

 

   

provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.

Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management assessed the effectiveness of our internal control over financial reporting as of January 28, 2012. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework.

Management believes that, as of January 28, 2012, our internal control over financial reporting was effective.

Our internal control over financial reporting as of January 28, 2012, has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report which is provided below.

 

/s/    George Feldenkreis        

   

/s/    Anita Britt        

George Feldenkreis     Anita Britt
Chairman of the Board and Chief Executive Officer     Chief Financial Officer

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

Perry Ellis International, Inc.

Miami, Florida

We have audited the internal control over financial reporting of Perry Ellis International, Inc. and subsidiaries (the “Company”) as of January 28, 2012, based on Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of January 28, 2012, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial statement schedule as of and for the year ended January 28, 2012 of the Company and our report dated April 12, 2012 expressed an unqualified opinion on those financial statements and financial statement schedule.

 

/s/ Deloitte & Touche LLP
Certified Public Accountants
Miami, Florida
April 12, 2012

 

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Changes in Internal Controls over Financial Reporting

There have been no changes in our internal controls over financial reporting that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Item  9B. Other Information

Not applicable.

PART III

Item 10. Directors, Executive Officers and Corporate Governance

Information regarding our directors and executive officers required by this item is included in our Proxy Statement relating to our 2012 Annual Meeting under the captions “Election of Directors” and “Management” and is incorporated herein by reference.

Information regarding our audit committee and our audit committee financial expert required by this item is included in our Proxy Statement relating to our 2012 Annual Meeting under the caption “Meetings and Committees of the Board of Directors” and is incorporated herein by reference.

Information regarding compliance with Section 16 of the Securities Exchange Act of 1934 is included in our Proxy Statement relating to our 2012 Annual Meeting under the caption “Section 16(a) Beneficial Ownership Reporting Compliance” and is incorporated herein by reference.

We have adopted a Code of Ethics that applies to all of our directors, officers, and employees. The Code of Ethics is posted on our website at www.pery.com. Amendments to, and waivers granted under, our Code of Ethics, if any, will be posted to our website as well.

Information describing any material changes to the procedures by which security holders may recommend nominees to our Board of Directors is included in our Proxy Statement related to our 2012 Annual Meeting under the caption “Election of Directors.”

Item 11. Executive Compensation

Information required by this item is included in our Proxy Statement related to our 2012 Annual Meeting under the captions “Executive Compensation”, “Compensation Discussion and Analysis,” “Director Compensation” and “Compensation Committee Report” and is incorporated herein by reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Information required by this item is included in our Proxy Statement related to our 2012 Annual Meeting under the captions “Security Ownership of Certain Beneficial Owners and Management” and “Equity Compensation Plan Information for Fiscal 2012” and is incorporated herein by reference.

Item 13. Certain Relationships and Related Transactions and Director Independence

Information required by this item is included in our Proxy Statement related to our 2012 Annual Meeting under the captions “Certain Relationships and Related Transactions” and “Meetings and Committees of the Board of Directors” and is incorporated herein by reference.

 

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Item 14. Principal Accounting Fees and Services

Information required by this item is included in our Proxy Statement related to our 2012 Annual Meeting Statement under the caption “Principal Accountant Fees and Services” and is incorporated herein by reference.

Item 15. Exhibits and Financial Statement Schedules

 

(a) Documents filed as part of this report

 

  (1) Consolidated Financial Statements.

The following Consolidated Financial Statements of Perry Ellis International, Inc. and subsidiaries are included in Part II, Item 8:

 

     Page  

Report of Independent Registered Public Accounting Firm

     F-2   

Consolidated Balance Sheets

     F-3   

Consolidated Statements of Income

     F-4   

Consolidated Statements of Comprehensive Income

     F-5   

Consolidated Statements of Changes in Stockholders’ Equity

     F-6   

Consolidated Statements of Cash Flows

     F-7   

Footnotes to Consolidated Financial Statements

     F-9   

(2)    Consolidated Financial Statement Schedule

  

Schedule II – Valuation and Qualifying Accounts

     F-51   

All other schedules required by applicable Securities and Exchange Commission regulations are either not required under the related instructions or inapplicable, therefore such schedules have been omitted.

 

  (3) Exhibits

 

Exhibit
No.

  

Exhibit Description

  

Where Filed

    3.1    Registrant’s Amended and Restated Articles of Incorporation    Filed as an Exhibit to the Registrant’s Proxy Statement for its 1998 Annual Meeting and incorporated herein by reference.
    3.2    Articles of Amendment to Articles of Incorporation    Filed as an annex to the Registrant’s Proxy Statement for its 2003 Annual Meeting and incorporated herein by reference.
    3.3    Registrant’s Amended and Restated Bylaws    Filed as an Exhibit to the Registrant’s Registration Statement on Form S-1 (File No. 33-60750) and incorporated herein by reference.

 

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    4.1    Form of Common Stock Certificate    Filed as an Exhibit to the Registrant’s Registration Statement on Form S-1 (File No. 33-60750) and incorporated herein by reference.
    4.7    Indenture by and among Perry Ellis International, Inc., the Subsidiary Guarantors party thereto and U.S. Bank Trust National Association dated March 8, 2011    Filed as an Exhibit to the Registrant’s Registration Statement on Form S-3 (File No. 333-167728) and incorporated herein by reference.
    4.8    First Supplemental Indenture by and among Perry Ellis International, Inc., the Subsidiary Guarantors party thereto and U.S. Bank National Association dated March 8, 2011    Filed as an Exhibit to the Registrant’s Current Report on Form 8-K dated March 4, 2011 and incorporated herein by reference.
    4.9    Form of Perry Ellis International, Inc. 7.875% Senior Subordinated Note due April 1, 2019 (set forth in Exhibit A to Exhibit 4.8 above)    Filed as an Exhibit to the Registrant’s Current Report on Form 8-K dated March 4, 2011 and incorporated herein by reference.
  10.1    Form of Indemnification Agreement between the Registrant and each of the Registrant’s Directors and Officers (1)    Filed as an Exhibit to the Registrant’s Annual Report on Form 10-K for the fiscal year ended January 31, 2005 and incorporated herein by reference.
  10.2    1993 Stock Option Plan (1)    Filed as an Exhibit to the Registrant’s Registration Statement on Form S-1 (File No. 33-60750) and incorporated herein by reference.
  10.4    Profit Sharing Plan (1)    Filed as an Exhibit to the Registrant’s Registration Statement on Form S-1 (File No. 33-96304) and incorporated herein by reference.
  10.5    Incentive Compensation Plan (1)    Filed as an Exhibit to the Registrant’s Proxy Statement for its 2000 Annual Meeting and incorporated herein by reference.
  10.6    Loan and Security Agreement dated as of October 1, 2002 by and among the Registrant, Jantzen, Inc., and Congress Financial Corporation (the “Senior Credit Facility”)    Filed as an Exhibit to the Registrant’s Current Report on Form 8-K dated September 17, 2010, as amended, and incorporated herein by reference.
  10.7    2002 Stock Option Plan (1)    Filed as an Annex to the Registrant’s Proxy Statement for its 2002 Annual Meeting and incorporated herein by reference.

 

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  10.8    Amendment No. 1 dated June 19, 2003 to the Senior Credit Facility    Filed as an Exhibit to the Registrant’s Current Report on Form 8-K dated September 17, 2010, as amended, and incorporated herein by reference.
  10.9    Amendment No. 2 dated September 22, 2003 to the Senior Credit Facility    Filed as an Exhibit to the Registrant’s Current Report on Form 8-K dated September 17, 2010, as amended, and incorporated herein by reference.
  10.10    Amendment No. 3 dated December 1, 2003 to the Senior Credit Facility    Filed as an Exhibit to the Registrant’s Annual Report on Form 10-K for the quarter ended January 31, 2004 and incorporated herein by reference.
  10.11    Amendment No. 4 dated February 25, 2004 to the Senior Credit Facility    Filed as an Exhibit to the Registrant’s Annual Report on Form 10-K for the quarter ended January 31, 2004 and incorporated herein by reference.
  10.12    Form of Stock Option Agreement (1)    Filed as an Exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended October 31, 2004 and incorporated herein by reference.
  10.13    Amendment No. 6 dated September 30, 2004 to the Senior Credit Facility    Filed as an Exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended October 31, 2004 and incorporated herein by reference.
  10.17    Amendment No. 7 dated February 26, 2005 to the Senior Credit Facility    Filed as an Exhibit to the Registrant’s Current Report on Form 8-K dated February 26, 2005 and incorporated herein by reference.
  10.23    2005 Management Incentive Compensation Plan (1)    Filed as an Exhibit to the Registrant’s Current Report on Form 8-K dated June 7, 2005 and incorporated herein by reference.
  10.25    Form of Stock Option Agreement pursuant to the 2005 Long-Term Incentive Compensation Plan (1)    Filed as an Exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended July 31, 2005 and incorporated herein by reference.

 

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  10.26    Form of Restricted Stock Agreement pursuant to the 2005 Long-Term Incentive Compensation Plan (1)    Filed as an Exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended July 31, 2005 and incorporated herein by reference.
  10.27    Perry Ellis International, Inc. Fiscal 2006 Management Incentive Plan (1)    Filed as an Exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended July 31, 2005 and incorporated herein by reference.
  10.28    Amendment No. 5 dated July 1, 2004 to the Senior Credit Facility    Filed as an Exhibit to the Registrant’s Annual Report on Form 10-K for the fiscal year ended January 31, 2006 and incorporated herein by reference.
  10.29    Amendment No. 8 dated September 30, 2005 to the Senior Credit Facility    Filed as an Exhibit to the Registrant’s Annual Report on Form 10-K for the fiscal year ended January 31, 2006 and incorporated herein by reference.
  10.30    Amendment No. 9 dated February 24, 2006 to the Senior Credit Facility    Filed as an Exhibit to the Registrant’s Annual Report on Form 10-K for the fiscal year ended January 31, 2006 and incorporated herein by reference.
  10.32    Business lease dated July 1, 2004 between George Feldenkreis and the Registrant for 50,000 square feet of warehouse space    Filed as an Exhibit to the Registrant’s Annual Report on Form 10-K for the fiscal year ended January 31, 2006 and incorporated herein by reference.
  10.33    Business lease between George Feldenkreis and the Registrant for 16,000 square feet of office Space    Filed as an Exhibit to the Registrant’s Annual Report on Form 10-K for the fiscal year ended January 31, 2006 and incorporated herein by reference.
  10.34    Promissory Note dated June 7, 2006 in favor Commercebank, N.A.    Filed as an Exhibit to the Registrant’s Current Report on Form 8-K dated June 13, 2006 and incorporated herein by reference.

 

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  10.35    Mortgage and Security Agreement dated June 7, 2006 in favor Commercebank, N.A.    Filed as an Exhibit to the Registrant’s Current Report on Form 8-K dated June 13, 2006 and incorporated herein by reference.
  10.36    Amendment No. 10 dated August 28, 2006 to the Senior Credit Facility    Filed as an Exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended July 31, 2006 and incorporated herein by reference.
  10.37    Amendment No. 11 dated November 29, 2006 to the Senior Credit Facility    Filed as an Exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended October 31, 2006 and incorporated herein by reference.
  10.38    Amendment No. 12 dated December 6, 2006 to the Senior Credit Facility    Filed as an Exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended October 31, 2006 and incorporated herein by reference.
  10.43    Employment Agreement dated February 08, 2008 between George Feldenkreis and the Registrant (1)    Filed as an Exhibit to the Registrant’s Annual Report on Form 10-K for the fiscal year ended January 31, 2008 and incorporated herein by reference.
  10.44    Employment Agreement dated February 08, 2008 between Oscar Feldenkreis and the Registrant (1)    Filed as an Exhibit to the Registrant’s Annual Report on Form 10-K for the fiscal year ended January 31, 2008 and incorporated herein by reference.
  10.46    Amended Form of Stock Restricted Agreement pursuant to the 2005 Long-Term Incentive Compensation Plan (1)    Filed as an Exhibit to the Registrant’s Annual Report on Form 10-K for the fiscal year ended January 31, 2008 and incorporated herein by reference.
  10.47    Amendment No. 13 to Loan and Security Agreement dated as of October 30, 2008    Filed as an Exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended October 31, 2008 and incorporated herein by reference.
  10.48    Employment Agreement dated March 2, 2009 between Anita Britt and the Registrant (1)    Filed as an Exhibit to the Registrant’s Current Report on Form 8-K dated September 17, 2010, as amended, and incorporated herein by reference.

 

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  10.49    Employment Agreement dated June 26, 2009 between Stephen Harriman and the Registrant (1)    Filed as an Exhibit to the Registrant’s Current Report on Form 8-K dated July 1, 2009 and incorporated herein by reference.
  10.51    Amendment No. 14 dated October 27, 2009 to Senior Credit Facility Agreement    Filed as an Exhibit to the Registrant’s Current Report on Form 8-K dated November 2, 2009 and incorporated herein by reference.
  10.52    Amendment No. 15 dated March 31, 2010 to Senior Credit Facility Agreement    Filed as an Exhibit to the Registrant’s Current Report on Form 8-K dated April 6, 2010 and incorporated herein by reference.
  10.53    Form of Stock-Settled Stock Appreciation Right Agreement pursuant to the 2005 Long-Term Incentive Compensation Plan (1)    Filed as an Exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended May 1, 2010, and incorporated herein by reference.
  10.54    Asset Purchase Agreement by and among Rafaella Apparel Group, Inc., Rafaella Apparel Far East Limited and Verrazano, Inc. and Perry Ellis International, Inc. dated as of January 7, 2011    Filed as an Exhibit to the Registrant’s Current Report on Form 8-K dated January 12, 2011 and incorporated herein by reference.
  10.55    Warrant for the Purchase of Shares of Common Stock dated as of January 28, 2011 issued to Rafaella Apparel Group, Inc.    Filed as an Exhibit to the Registrant’s Current Report on Form 8-K dated February 03, 2011 and incorporated herein by reference.
  10.56    Form of Performanced-Based Restricted Stock Agreement pursuant to the Second Amended and Restated 2005 Long-Term Incentive Compensation Plan (1)    Filed as an Exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended July 30, 2011, and incorporated herein by reference.
  10.57    Form of Restricted Stock Agreement pursuant to the Second Amended and Restated 2005 Long-Term Incentive Compensation Plan (1)    Filed as an Exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended July 30, 2011, and incorporated herein by reference.
  10.58    Form of Stock-Settled Stock Appreciation Right Agreement pursuant to the Second Amended and Restated 2005 Long-Term Incentive Compensation Plan (1)    Filed as an Exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended July 30, 2011, and incorporated herein by reference.
  10.59    Form of Non-Qualified Stock Option Agreement pursuant to the Second Amended and Restated 2005 Long-Term Incentive Compensation Plan (1)    Filed as an Exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended July 30, 2011, and incorporated herein by reference.

 

58


Table of Contents
  10.60    Amended and Restated Loan and Security Agreement dated December 2, 2011 among the Perry Ellis International, Inc., the subsidiaries named as Borrowers or Guarantors therein, the Lenders named therein, Wells Fargo Bank, National Association, as agent for the Lenders, and Bank of America, N.A., as syndication agent    Filed as an Exhibit to the Registrant’s Current Report on Form 8-K dated December 2, 2011, and incorporated herein by reference.
  10.61    Second Amended and Restated 2005 Long-Term Incentive Compensation Plan (1)    Filed as Annex B to the Registrant’s Proxy Statement for its 2011 Annual Meeting and incorporated herein by reference.
  10.62    2011 Management Incentive Compensation Plan (1)    Filed as Annex A to the Registrant’s Proxy Statement for its 2011 Annual Meeting and incorporated herein by reference.
  21.1    Subsidiaries of the Registrant    Filed herewith.
  23.1    Consent of Deloitte & Touche LLP, registered public accounting firm regarding financial statements and internal controls over financial reporting of the Registrant    Filed herewith.
  31.1    Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a), promulgated under the Securities Exchange Act of 1934, as amended    Filed herewith.
  31.2    Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a), promulgated under the Securities Exchange Act of 1934, as amended    Filed herewith.
  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    Filed herewith.
  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    Filed herewith.
101.INS    XBRL Instance Document (2)    Filed herewith.
101.SCH    XBRL Taxonomy Extension Schema (2)    Filed herewith.
101.CAL    XBRL Taxonomy Extension Calculation Linkbase (2)    Filed herewith.
101.DEF    XBRL Taxonomy Extension Definition Linkbase (2)    Filed herewith.
101.LAB    XBRL Taxonomy Extension Label Linkbase (2)    Filed herewith.
101.PRE    XBRL Taxonomy Extension Presentation Linkbase (2)    Filed herewith.

 

(1)

Management Contract or Compensation Plan.

(2)

Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections

 

(b) Item 601 Exhibits

The exhibits required by Item 601 of Regulation S-K are set forth in (a) (3) above.

 

(c) Financial Statement Schedules

The financial statement schedules required by Regulation S-K are set forth in (a) (2) above.

 

59


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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.

 

    PERRY ELLIS INTERNATIONAL, INC.
Dated: April 12, 2012     By:  

/S/    GEORGE FELDENKREIS        

     

George Feldenkreis

Chairman of the Board and

Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

 

Name and Signature

  

Title

 

Date

/S/    GEORGE FELDENKREIS        

George Feldenkreis

  

Chairman of the Board and Chief Executive Officer (Principal Executive Officer)

  April 12, 2012

/S/    OSCAR FELDENKREIS        

Oscar Feldenkreis

  

Vice Chairman of the Board, President, Chief Operating Officer and Director

  April 12, 2012

/S/    ANITA BRITT        

Anita Britt

  

Chief Financial Officer (Principal Financial and Accounting Officer)

  April 12, 2012

/S/    JOE ARRIOLA        

Joe Arriola

  

Director

  April 12, 2012

/S/    GARY DIX        

Gary Dix

  

Director

  April 12, 2012

/S/    JOSEPH P. LACHER        

Joseph P. Lacher

  

Director

  April 12, 2012

/S/    JOSEPH NATOLI        

Joseph Natoli

  

Director

  April 12, 2012

/S/    EDUARDO M. SARDINA        

Eduardo M. Sardina

  

Director

  April 12, 2012

 

60


Table of Contents

INDEX TO FINANCIAL STATEMENTS

PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES

 

Report of Independent Registered Public Accounting Firm

     F-2   

Consolidated Balance Sheets

     F-3   

Consolidated Statements of Income

     F-4   

Consolidated Statements of Comprehensive Income

     F-5   

Consolidated Statements of Changes in Stockholders’ Equity

     F-6   

Consolidated Statements of Cash Flows

     F-7   

Footnotes to Consolidated Financial Statements

     F-9   

Schedule II – Valuation and Qualifying Accounts

     F-51   

 

F-1


Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

Perry Ellis International, Inc.

Miami, Florida

We have audited the accompanying consolidated balance sheets of Perry Ellis International, Inc. and subsidiaries (the “Company”) as of January 28, 2012 and January 29, 2011, and the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended January 28, 2012. Our audits also included the financial statement schedule listed in the Index at Item 15. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Perry Ellis International, Inc. and subsidiaries at January 28, 2012 and January 29, 2011, and the results of their operations, cash flows and their statements of comprehensive income for each of the three years in the period ended January 28, 2012, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of January 28, 2012, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated April 12, 2012 expressed an unqualified opinion on the Company’s internal control over financial reporting.

/s/ Deloitte & Touche LLP

Certified Public Accountants

Miami, Florida

April 12, 2012

 

F-2


Table of Contents

PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(amounts in thousands, except share data)

 

     January 28,
2012
    January 29,
2011
 

ASSETS

    

Current Assets:

    

Cash and cash equivalents

   $ 24,116      $ 18,524   

Restricted cash

     —          9,369   

Accounts receivable, net

     145,563        129,534   

Inventories

     198,264        175,755   

Deferred income taxes

     11,873        9,926   

Prepaid income taxes

     8,247        3,867   

Other current assets

     13,613        14,656   
  

 

 

   

 

 

 

Total current assets

     401,676        361,631   

Property and equipment, net

     56,496        55,077   

Other intangible assets, net

     242,634        250,585   

Goodwill

     13,794        13,794   

Other assets

     9,595        4,946   
  

 

 

   

 

 

 

TOTAL

   $ 724,195      $ 686,033   
  

 

 

   

 

 

 

LIABILITIES AND EQUITY

    

Current Liabilities:

    

Accounts payable

   $ 80,253      $ 74,102   

Accrued expenses and other liabilities

     15,879        23,490   

Accrued interest payable

     4,186        3,744   

Current portion - real estate mortgages

     664        592   

Unearned revenues

     4,179        4,438   

Other current liabilities

     6,599        6,659   
  

 

 

   

 

 

 

Total current liabilities

     111,760        113,025   
  

 

 

   

 

 

 

Senior subordinated notes payable, net

     150,000        105,221   

Senior credit facility

     21,679        97,342   

Real estate mortgages

     25,114        25,793   

Deferred pension obligation

     17,326        13,120   

Unearned revenues and other long-term liabilities

     15,425        17,587   

Deferred income taxes

     16,396        11,005   
  

 

 

   

 

 

 

Total long-term liabilities

     245,940        270,068   
  

 

 

   

 

 

 

Total liabilities

     357,700        383,093   
  

 

 

   

 

 

 

Commitment and contingencies

    

Equity:

    

Preferred stock $.01 par value; 5,000,000 shares authorized; no shares issued or outstanding

     —          —     

Common stock $.01 par value; 100,000,000 shares authorized; 16,787,161 shares issued and outstanding as of January 28, 2012 and 16,609,966 shares issued and outstanding as of January 29, 2011

     167        166   

Additional paid-in-capital

     160,997        119,560   

Retained earnings

     229,467        203,950   

Accumulated other comprehensive loss

     (8,178     (3,321
  

 

 

   

 

 

 

Total

     382,453        320,355   

Treasury stock at cost; 1,157,300 shares as of January 28, 2012 and 2,462,196 shares as of January 29, 2011

     (15,958     (17,415
  

 

 

   

 

 

 

Total equity

     366,495        302,940   
  

 

 

   

 

 

 

TOTAL

   $ 724,195      $ 686,033   
  

 

 

   

 

 

 

See footnotes to consolidated financial statements

 

F-3


Table of Contents

PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

FOR THE YEARS ENDED

(amounts in thousands, except per share data)

 

     January 28,
2012
     January 29,
2011
     January 30,
2010
 

Revenues:

        

Net sales

   $ 955,549       $ 763,884       $ 729,217   

Royalty income

     25,043         26,404         24,985   
  

 

 

    

 

 

    

 

 

 

Total revenues

     980,592         790,288         754,202   

Cost of sales

     656,850         507,829         505,104   
  

 

 

    

 

 

    

 

 

 

Gross profit

     323,742         282,459         249,098   

Operating expenses

        

Selling, general and administrative expenses

     248,618         220,018         200,356   

Depreciation and amortization

     13,673         12,211         13,625   

Impairment on long-lived assets

     6,066         392         254   
  

 

 

    

 

 

    

 

 

 

Total operating expenses

     268,357         232,621         214,235   
  

 

 

    

 

 

    

 

 

 

Operating income

     55,385         49,838         34,863   

Costs on early extinguishment of debt

     1,306         730         357   

Interest expense

     16,103         13,203         17,371   
  

 

 

    

 

 

    

 

 

 

Net income before income taxes

     37,976         35,905         17,135   

Income tax provision

     12,459         11,393         3,615   
  

 

 

    

 

 

    

 

 

 

Net income

     25,517         24,512         13,520   

Less: net income attributable to noncontrolling interest

     —           400         353   
  

 

 

    

 

 

    

 

 

 

Net income attributable to Perry Ellis International, Inc.

   $ 25,517       $ 24,112       $ 13,167   
  

 

 

    

 

 

    

 

 

 

Net income attributable to Perry Ellis International, Inc. per share:

        

Basic

   $ 1.71       $ 1.84       $ 1.04   
  

 

 

    

 

 

    

 

 

 

Diluted

   $ 1.60       $ 1.70       $ 1.01   
  

 

 

    

 

 

    

 

 

 

Weighted average number of shares outstanding

        

Basic

     14,927         13,110         12,699   

Diluted

     15,950         14,149         13,005   

See footnotes to consolidated financial statements

 

F-4


Table of Contents

PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE YEARS ENDED

(amounts in thousands)

 

     January 28,
2012
    January 29,
2011
     January 30,
2010
 

Net income

   $ 25,517      $ 24,512       $ 13,520   
  

 

 

   

 

 

    

 

 

 

Other Comprehensive income:

       

Foreign currency translation adjustments, net

     (264     491         2,298   

Unrealized (loss) gain on pension liability, net of tax

     (4,593     340         353   
  

 

 

   

 

 

    

 

 

 

Total other comprehensive (loss) income

     (4,857     831         2,651   
  

 

 

   

 

 

    

 

 

 

Comprehensive income

     20,660        25,343         16,171   

Less: comprehensive income attributable to the noncontrolling interest

     —          897         353   
  

 

 

   

 

 

    

 

 

 

Comprehensive income attributable to Perry Ellis International, Inc.

   $ 20,660      $ 24,446       $ 15,818   
  

 

 

   

 

 

    

 

 

 

See footnotes to consolidated financial statements

 

F-5


Table of Contents

PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THE YEARS ENDED JANUARY 28, 2012, JANUARY 29, 2011 AND JANUARY 30, 2010

(amounts in thousands, except share data)

 

    COMMON STOCK     ADDITIONAL
PAID-IN
    TREASURY     ACCUMULATED
OTHER
COMPREHENSIVE
INCOME
    RETAINED     NON
CONTROLLING
       
    SHARES     AMOUNT     CAPITAL     STOCK     (LOSS)     EARNINGS     INTEREST     TOTAL  

BALANCE, JANUARY 31, 2009

    15,996,081      $ 160      $ 103,933      $ (15,664   $ (6,306   $ 166,671      $ 3,307      $ 252,101   

Exercise of stock options

    80,202        1        635        —          —          —          —          636   

Tax benefit for exercise of non-qualified stock options

    —          —          205        —          —          —          —          205   

Restricted shares and options issued as compensation

    18,290        —          2,754        —          —          —          —          2,754   

Net income

    —          —          —          —          —          13,167        353        13,520   

Purchase of treasury stock

    —          —          —          (1,751     —          —          —          (1,751

Other comprehensive income

    —          —          —          —          2,651        —          —          2,651   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

BALANCE, JANUARY 30, 2010

    16,094,573        161        107,527        (17,415     (3,655     179,838        3,660        270,116   

Exercise of stock options

    427,030        4        2,673        —          —          —          —          2,677   

Tax benefit for exercise of non-qualified stock options

    —          —          2,270        —          —          —          —          2,270   

Restricted shares and options issued as compensation

    88,363        1        4,491        —          —          —          —          4,492   

Net income

    —          —          —          —          —          24,112        400        24,512   

Warrants issued in connection with acquisition

    —          —          2,599        —          —          —          —          2,599   

Other comprehensive income

    —          —          —          —          334        —          497        831   

Payment of noncontrolling interest

    —          —          —          —          —          —          (4,557     (4,557
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

BALANCE, JANUARY 29, 2011

    16,609,966      $ 166      $ 119,560      $ (17,415   $ (3,321   $ 203,950      $ —        $ 302,940   

Exercise of stock options

    530,109        5        4,763        —          —          —          —          4,768   

Tax benefit for exercise of non-qualified stock options

    —          —          1,267        —          —          —          —          1,267   

Restricted shares and options issued as compensation

    109,282        1        (109     —          —          —          —          (108

Net income

    —          —          —          —          —          25,517        —          25,517   

Issuance of common stock

    2,000,000        20        52,906        —          —          —          —          52,926   

Purchase of treasury stock

    —          —          —          (15,958     —          —          —          (15,958

Other comprehensive income

    —          —          —          —          (4,857     —          —          (4,857

Retirement of treasury stock

    (2,462,196     (25     (17,390     17,415        —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

BALANCE, JANUARY 28, 2012

    16,787,161      $ 167      $ 160,997      $ (15,958   $ (8,178   $ 229,467      $ —        $ 366,495   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See footnotes to consolidated financial statements

 

F-6


Table of Contents

PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED

(amounts in thousands)

 

     January 28,
2012
    January 29,
2011
    January 30,
2010
 

CASH FLOWS FROM OPERATING ACTIVITIES:

      

Net income

   $ 25,517      $ 24,512      $ 13,520   

Adjustments to reconcile net income to net cash provided by operating activities, net of acquisitions:

      

Depreciation and amortization

     13,441        12,044        13,393   

Provision for bad debts

     93        96        1,307   

Tax benefit from exercise of stock options

     (1,267     (2,270     (205

Impairment on long-lived assets

     6,066        392        254   

Amortization of debt issue costs

     582        429        531   

Amortization of premiums and discounts

     (16     1        186   

Deferred income taxes

     6,354        7,189        3,902   

Share based compensation

     (108     4,492        2,754   

Gain on sale of intangible assets

     —          —          (886

Change in fair value and settlement of derivatives

     (1,832     2,153        985   

Costs on early extinguishment of debt

     1,306        730        357   

Changes in operating assets and liabilities

      

Accounts receivable, net

     (16,295     14,405        4,606   

Inventories

     (22,828     (43,133     28,147   

Other current assets and prepaid income taxes

     (3,540     3,248        6,168   

Other assets

     (1,497     (486     35   

Accounts payable and accrued expenses

     (1,936     6,736        17,130   

Accrued interest payable

     442        (738     (854

Unearned revenues and other liabilities

     (758     (5,234     (2,641

Deferred pension obligation

     (3,012     (3,562     106   
  

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

     712        21,004        88,795   
  

 

 

   

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

      

Purchase of property and equipment

     (13,132     (6,237     (2,734

Proceeds on sale of intangible assets

     2,875        1,100        700   

Redemption (payment) of restricted funds as collateral

     9,369        (9,369     —     

Payment for acquired businesses

     —          (75,438     —     

Proceeds in connection with purchase price adjustment

     —          (4,547     —     

Payment on purchase of intangible assets

     (535     —          —     

Payment on purchase of operating leases

     (904     —          —     
  

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     (2,327     (94,491     (2,034
  

 

 

   

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

      

Borrowings from senior credit facility

     398,208        576,319        646,234   

Payments on senior credit facility

     (473,871     (478,977     (700,649

Deferred financing fees

     (103     (158     —     

Payments on real estate mortgage

     (549     (11,219     (469

Proceeds from refinancing of real estate mortgage

     —          13,000        —     

Proceeds from issuance of senior subordinated notes

     150,000        —          —     

Payments on senior subordinate notes

     (105,792     (25,454     (20,848

Debt issuance costs

     (3,504     —          —     

Proceeds from issuance of common stock

     56,000        —          —     

Stock issuance costs

     (3,074     —          —     

Payments on capital leases

     (381     (301     (357

Payment of noncontrolling interest

     —          (4,557     —     

Proceeds from exercise of stock options

     4,768        2,677        636   

Tax benefit from exercise of stock options

     1,267        2,270        205   

Purchase of treasury stock

     (15,958     —          (1,751
  

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     7,011        73,600        (76,999
  

 

 

   

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

     196        142        (306
  

 

 

   

 

 

   

 

 

 

NET INCREASE IN CASH AND CASH EQUIVALENTS

     5,592        255        9,456   

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR

     18,524        18,269        8,813   
  

 

 

   

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS AT END OF YEAR

   $ 24,116      $ 18,524      $ 18,269   
  

 

 

   

 

 

   

 

 

 

 

Continued

 

F-7


Table of Contents

PERRY ELLIS INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED

(amounts in thousands)

 

     January 28,
2012
    January 29,
2011
     January 30,
2010
 

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

       

Cash paid during the period for:

       

Interest

   $ 15,944      $ 14,985       $ 17,054   
  

 

 

   

 

 

    

 

 

 

Income taxes

   $ 6,616      $ 787       $ 1,070   
  

 

 

   

 

 

    

 

 

 

NON-CASH FINANCING AND INVESTING ACTIVITIES:

       

Capital lease financing

   $ 66      $ 27       $ 1,001   
  

 

 

   

 

 

    

 

 

 

Accrued purchases of property and equipment

   $ 613      $ 430       $ 14