SecProbe.io

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corresp

June 14, 2005

VIA EDGAR

Securities and Exchange Commission

450 Fifth Street, N.W.

Washington, DC 20549

    Re:

    Enesco Group, Inc. (the “Company”)

    Form 10-K for the year ended December 31, 2004

    File No. 001-09267

Ladies and Gentlemen:

     This letter is submitted by the Company to respond to the comments of the staff of the
Securities and Exchange Commission (“SEC”). Each of the staff’s comments is set forth below (with
page references unchanged) and is followed by the Company’s response with page references to its
Form 10-K filing.

     The Company acknowledges that (1) it is responsible for the adequacy and accuracy of the
disclosure in its filings, (2) staff comments or changes to disclosure in response to the staff’s
comments do not foreclose the SEC from taking any action with respect to the filing, and (3) the
Company may not assert staff comments as a defense in any proceeding initiated by the SEC or any
person under the federal securities laws of the United States.

Form 10-K for the year ended December 31, 2004

General

    1.

    Where a comment below requests additional disclosures or other revisions to be made,
please include the additional disclosures and revisions in your future annual and
quarterly filings, as applicable.

Securities and Exchange Commission

June 14, 2005

Page 2

Response:

We will include additional disclosures and revisions in our future annual and quarterly filings, as
applicable.

Item 1. Business, page 3

    2.

    We note that you have disclosed revenues of your Heartwood Creek by Jim Shore and
Precious Moments lines for fiscal 2004. Please disclose the amount or percentage of
revenue contributed by your Heartwood Creek by Jim Shore and Precious Moments lines for
each of the last three years. Please tell us if any other brands accounted for ten (10)
percent or more of consolidated revenue in any of the last three years. If so, please
tell us and disclose for each of the last three years the amount or percentage or revenue
contributed by each other brand accounting for 10 percent or more of consolidated revenue
in any of the last three years. See Item 101(c)(i) of Regulation S-X.

Response:

The following product lines accounted for 10% or more of consolidated revenue in any of the last
three years:

    2004

    2003

    2002

    Precious Moments

    22%

    33%

    37%

    Heartwood Creek

    13%

    5%

    1%

    Cherished Teddies

    5%

    8%

    11%

Under Item 7. Management’s Discussion and Analysis, in the second and the fifth full paragraphs on
page 21, the Company disclosed the above data for Precious Moments and Heartwood Creek. Under Item
1. Business, on page 7 in a subsection labeled “Sales and Marketing—United States,” the Company
erroneously disclosed that Precious Moments was 33% (rather than 22%) of consolidated sales in the
U.S. for 2004.

Design, page 8

    3.

    We note that you have a continuous product design and development program. Please
disclose the amount spent on company sponsored design and development activities during
each of the years presented. See Item 101(c)(xi) of Regulation S-K. Please also disclose
design and development costs charged to expense in each period presented in the notes to
your financial statements.

Securities and Exchange Commission

June 14, 2005

Page 3

Response:

The primary costs associated with our continuous product design and development program relate to
our in-house creative group whose responsibilities include all creative aspects from concept to
product prototype, design, and enhancement. All of our payroll costs and other SG&A costs for our
in-house creative group are expensed as incurred.

While we acknowledge that our product design and development program expenses are research and
development activities, as defined in SFAS No. 2, Accounting for Research and Development Costs, we
believe that the amounts are immaterial as they are approximately 1% of sales and, therefore, do
not need to be disclosed under the requirements of Item 101(c)(xi) of Regulation S-K.

Management’s Discussion and Analysis of Financial Position and Results of Operations, page 17
General

    4.

    Please quantify in dollars to the extent possible changes in cost of sales and/or
gross profit related to each of the factors you identify. For example, quantify the
impact of the inventory valuation charges, ERP system implementation costs, higher freight
costs, foreign currency exchange rates, product mix and lower royalty costs on cost of
sales or gross profit.

Response:

The following is the quantification of the changes in gross profit from 2003 to 2004:

    Factor

    Increase (Decrease)

    (in thousands)

    Inventory valuation charges

    $
    (2,000
    )

    ERP system implementation costs

    (2,732
    )

    Higher freight costs

    (1,962
    )

    Foreign currency translation rates

    3,672

    Royalty costs

    (4,858
    )

    Product mix (volume)

    (12,236
    )

    Acquisition of Gregg Gift

    2,929

    Acquisition of Dartington

    2,199

    License acquisition of Walt Disney Art
Classics

    5,756

    Total gross profit change

    $
    (9,232
    )

Critical Accounting Policies, page 18

    5.

    Please quantify and discuss, where material, the effect of critical estimates on your
results of operations. Please tell us whether changes in your assumptions,

Securities and Exchange Commission

June 14, 2005

Page 4

    such as those related to the historic write-off percentage of accounts receivable, sales
returns, selling prices of excess inventories and estimates of future operating results and
related cash flows are reasonably likely to occur. If so, where material, please quantify
the potential impact on your financial condition and operating results of one or more
hypothetical changes in the assumptions underlying such critical accounting estimates.
Please also disclose the impact of significant changes in estimates during the periods
presented. For example, disclose the effect of establishing a full valuation allowance
against your domestic deferred tax assets and the effect accelerated depreciation of your
ERP system. Please refer to SEC Release No. 33-8350.

Response:

Accounts Receivable Allowances — Reserve percentages used in these calculations reflect
historical experience and, generally, do not fluctuate materially. While management believes that
these assumptions are reasonable, historical trends do not guarantee that future write-offs and
returns will not increase, which would require an increase to the allowance. For example, a 1%
increase in the percentages used in calculating the allowances for the general reserve would result
in an increase of $215,000 in the returns and allowances reserve and a $455,000 increase in the bad
debt reserve. The total changes from 2003 to 2004 in the general reserve percentages were +0.75%
for returns and allowances and +0.60% for bad debt.

Inventory Reserves — The recovery rate on disposition of excess inventory depends upon a
number of factors such as market demand for close-out items and levels of such inventory.
Historical averages are used to determine the likely recoverability of cost. If market conditions
deteriorate, it is likely that inventory will be sold at greater discounts, necessitating an
increase to the reserve. A change of 5% in this loss percentage would result in an additional
inventory reserve of $441,000.

Impairments of Tangible and Intangible Assets — The total impact of accelerated
depreciation in 2004 was $0.9 million, reducing the net book value of our ERP System from $6.4
million to $5.5 million. No further changes in accelerated depreciation are likely as the ERP
System will be fully depreciated by June 30, 2005, the end of its estimated useful life.

Tax Accruals — During 2004, the operating performance of the Company caused a change in the
underlying estimates regarding the realization of net deferred tax assets. As of December 31,
2004, management evaluated all available evidence and concluded that management could no longer
claim that it was more likely than not that $18.6 million of net deferred tax assets would be
realized and, therefore, provided a valuation allowance. The valuation allowance may require
adjustment in future periods due to changes in estimates of future taxable income.

    6.

    We note that the portion of your accounts receivable reserve related to your historic
write-off percentage approximates 2% of accounts receivable. We also

Securities and Exchange Commission

June 14, 2005

Page 5

    note that bad debt expense and write-offs reflected in Schedule II are less than 1% of net
revenues for the years reported. Please explain to us why these percentages differ.

Response:

Enesco calculates its accounts receivable reserve in part based on historical write-offs as a
percentage of average accounts receivable rather than as a percentage of net revenues.

    7.

    We note that accounts receivable allowances do not agree to the allowances disclosed
in Schedule II. Please tell us why.

Response:

The allowances disclosed in Schedule II include approximately $900,000 of other contra-accounts
receivable balances, consisting primarily of customer rebates. As the determination of these
amounts do not require significant judgment, we do not consider them to be critical accounting
policies.

    8.

    Please tell us and disclose the amount of your adjustment to inventory shrinkage as a
result of your year-end physical inventory process.

Response:

As a result of our year-end physical inventory process, an adjustment to inventory to record
shrinkage of $517,000 was required.

2003 Compared to 2002 Consolidated Results General

    9.

    You disclose that international net revenues increased due to higher foreign currency
rates in 2003, but that revenues from your Precious Moments and Cherished Teddies product
lines decreased as a result of lower foreign currency exchange rates. Please explain and
reconcile these statements to us and revise if necessary.

Response:

The international net revenues increased by approximately $9.0 million due to the change in foreign
currency translation rates in 2003 from 2002. The net revenues from the Precious Moments and
Cherished Teddies product lines decreased, resulting from a decline in customer demand partially
offset by the benefit from the change in foreign currency translation rates relative to 2002. The
reference in the next to last paragraph on page 22, in Item 7. Management’s Discussion and
Analysis, of the Form 10-K, “foreign currency revenues which were translated into United States
dollars at lower exchange rates in 2003 . . . ,” was referring to the weaker U.S. dollar in 2003
compared to 2002.

Securities and Exchange Commission

June 14, 2005

Page 6

Interest Expense and Income, page 23

    10.

    Please tell us how you account for accrued interest on probable tax liabilities and
penalties. If you do not accrue interest on probable tax liabilities and penalties,
please explain to us your basis for not doing so.

Response:

Enesco’s policy and practice is to accrue for interest and penalties on probable tax liabilities if
it is probable that the taxing authority will assess interest and/or a penalty and the assessment
can be reasonably estimated. The accruals are included in current income taxes payable because it
is uncertain when an assessment for interest and penalties will be paid. To the extent accruals
differ from actual assessments or when estimates of the amounts change, the accruals are adjusted
through the provision for income taxes.

Liquidity and Capital Resources, page 24

    11.

    Please provide a more insightful analysis of financial condition, changes in
financial condition and cash flows, including changes in working capital components, for
each period presented. In doing so, consider explaining the underlying reasons and
implications of material changes between periods to provide investors with an
understanding of trends and variability in cash flows. Please refer to SEC Release No.
33-8350 and Item 303 of Regulation S-K.

Response:

     The following disclosure is intended to supplement the existing disclosure about the Company’s cash
flows, which appears at the beginning of Liquidity and Capital Resources on page 27.

     The significant components of the changes in 2004 working capital included: increased accounts
receivable primarily due to the Gregg Gift and Dartington acquisitions of $2.3 million; increased
accounts receivable due to slower customer statement processing related to the ERP system
implementation of $2.0 million and increased sales with extended payment terms of $1.0 million;
increased inventory levels of $4.6 million of which $3.3 million related to the two acquisitions;
lower ending balances in accounts payable and accrued expenses of $3.0 million due to the timing of
payments; reduced bonus accrual of $2.2 million related to lower income; and an increase of $4.5
million in fourth quarter unpaid royalties and royalty accruals associated with the Precious
Moments product line.

     With respect to the comparable prior periods of 2002 to 2003, cash flow disclosures referenced in
the liquidity and capital resources sections of our Form 10-K for the year ended December 31, 2003
will be included in applicable filings.

Securities and Exchange Commission

June 14, 2005

Page 7

    12.

    Please include other long-term liabilities reflected on your balance sheets in the
table of contractual obligations. Please also disclose in a footnote to the table that
you have excluded future variable rate interest payments under your short-term debt
agreements. In addition, if you have entered into binding purchase obligations, please
disclose their amounts in the table and describe the nature of the obligations in a
footnote. If you have not entered into binding purchase obligations, please explain to us
why your executory contracts and purchase orders are not binding purchase obligations.
Refer to Item 303(5) of Regulation S-K.

Response:

A summary of additional significant contractual obligations is as follows:

    Obligations

    Total

    < 1 Yr

    1-3 Yrs

    4-5 Yrs

    > 5 Yrs

    (in millions)

    Short-term borrowings (1)

    $
    26.4

    $
    26.4

    $
    —

    $
    —

    $
    —

    Letters of credit

    4.1

    4.1

    —

    —

    —

    Operating leases

    25.0

    6.4

    13.4

    3.7

    1.5

    License guarantees

    45.7

    15.5

    30.2

    —

    —

    Post-retirement benefits

    5.0

    2.0

    0.4

    0.4

    2.2

    Purchase obligations (2)

    Total contractual
cash obligations

    $
    106.2

    $
    54.4

    $
    44.0

    $
    4.1

    $
    3.7

    (1)

    We have excluded future variable rate interest payments under our short-term debt
agreements.

    (2)

    The Company’s systems were not programmed to determine the outstanding purchase order
obligations at December 31, 2004, nor can the Company determine those obligations as of
December 31, 2004 at this point in time. The Company intends to modify its systems to
allow it to calculate that information for inclusion in its future filings.

Consolidated Financial Statements Notes to Consolidate Financial Statement Consolidated Balance Sheets, page 30

    13.

    We note that the change in the carrying amount of goodwill for the year ended
December 31, 2004 does not agree to your disclosures in Note 11. Please disclose the
aggregate amount of goodwill acquired for each period presented. See paragraph 45(c) of
SFAS 142.

Securities and Exchange Commission

June 14, 2005

Page 8

Response:

The aggregate amount of goodwill for each period presented is, as follows:

    (in thousands)

    Balance at December 31, 2002

    $
    —

    Add: Bilston and Battersea acquisition