PVH Corp (PVH) 2001 Q4 法說會逐字稿

This is Phillips Van-Heusen Corporation fourth quarter and year end earnings release.

The web cast conference call is being recorded on behalf of PVH and consists of copy righted materials. It may not be recorded, reproduced, re-transmitted, re-broadcast, downloaded or otherwise used without PVH's written permission.

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results of current expectations as more fully discussed in our state public statements found in our SEC filings.

The company does not undertake any obligations to update publicly any forward-looking statements, including without limitations any

broadening revenues or earnings whether as a result of receipt of new information, future rents or otherwise.

As a

to inform you that this conference is being recorded for re-broadcast and all purposes to be within these modes. At specific request of the company we will open up the conference for questions and answers after the presentation. I will now turn the conference over to Mr. Bruce Klatsky. Please go ahead sir.

Thank you very much. Good morning everybody. Thank you for joining us.

I'm joined this morning as usual by Mark Weber, our President, Manny Chirico, our CFO,

our Treasurer, and

Investor Relations. It's good to be with you this morning.

I guess just some quick remarks before I turn it over to Manny. 2001, I'm sure you're tired of hearing it, was a very disappointing year for us at the end of the day. Disappointing because the first half of the year, for us, started incredibly strong, leading to what were even some high expectations for us. Right through Labor Day we were quit pleased with where our business's were going and felt that we were really going to blow away the year, if you will.

We then hit a major bump. It's a little difficult to talk about, not only in business terms, but let's talk about business today. Really hit us hard. In our wholesale businesses, because retailers became convinced that they needed to end the year lean and cut open

, and cut EPI profits, right in the middle and their inventory take outs were well below what everyone planned and perhaps even what they really needed to take.

On the retail side of the house many of our retail stores, as you know, are located nearest that to the nations we graded a new phrase, lied too, places such as Las Vegas and Orlando, Florida where we have very strong businesses, really bottomed very, very low retail sales. We were forced to react quickly and, I guess I'm very proud of the way our various management teams did. We ended the year with the Crystal Plate Inventories Annual talk about the climate and location of that both qualitatively and quantitatively our inventories are clean as a whistle. Our cash flow is substantially better than what we planned with the down economy and we're very proud of that.

On the up side we finished the year on the wholesale side of the house and the retail side of the house from the middle of November right through January quite strong and a little better than what we'd expected. Our weakest category across the board was dress shirts. Dress shirts had a rough year.

Sportswear, I guess the best way to look at it for us, was that we lost a few job sites but our eyes on Van Heusen brand particularly performed very strong and we felt good about that. And the numbers revealed out turn around in footwear continued as we had substantial improvement in our operating process for that group. Big disappointments that were the months of September, October, November and early November really hurt us. Pleased that we're able to execute again, in fact deliver what we did on the balance sheet side, and cash flow side. And it's good that business started to get better Christmas.

And in fact in the month of February, as we now look forward to 2002, we are planning conservatively, as I know you are aware, we're planning from a top standpoint should be down in the first quarter. Basically flattened the second and we think we will have growth in the second half. I should comment that my opinion the pipeline, both in terms of the wholesale side and the retail side is very lean.

So if the consumer reacts we could have a quicker and more aggressive bounce back than we think. I'm cautiously optimistic about that. We have the ability to react if we hear something in the first part of half of the year. So that we could increase our earnings even more than Mannys' already told you we have for next year, because there is no inventory there that needs to be marked down. So we feel good about that. As I said the month of February was somewhat better than our plan. With that I'll turn it over for Manny to give you a little bit of quantification.

As Bruce said our fourth quarter results were negatively impacted by the events of September eleventh and a general slow down in the economy which contributed to an overall weak retail in buying. Sales in the quarter declined thirteen percent to $326 million.

Last year's fourth quarter did in include 15 million of Arrow liquidation sales, which was sold at a loss. And $20 million of sales facilitated with an extra week of sales whose last year was a 53 retail year. The balance of the sales at this point relate principally to

apparel sales particularly core dress shirts.

Operating income for the apparel segment in the fourth quarter decline 21 percent to $18 million. Apparel operating income margins decline 50 basis points to 70.6 percent from last year's 8.1 percent. The reduction is directly attributable to a lack of expense leverage as Arrow sales decline about 15 a quarter. A footwear segment continued a financial turnaround. In spite of very tough retail footwear environment.

Operating income for the apparel for the footwear segment improves 35 percent to $2.7 million from $2 million last year. Footwear operating margins improved 100 cases points to 50.1 percent. A significant reduction in promotional activities resulted in an audit sales decline, which generated significantly higher gross margin. Income before restructuring charges in the fourth quarter was $4 million with 40 cents per share, which was at the top end our leading

, and prepares 6.5 million for 24 times per share last year.

As we have previously announced we recorded a 13.4 million fourth quarter restructuring charge to eliminate certain corporate and divisional positions, to redress shirt manufacturing facilities and liquidate lady dress shirt inventory. The net income after restructuring charge was 38 cents per share for the year and a loss of 34 cents per share for the quarter.

From a cash flow point of view we generated $23 million of free cash flow, which is about $10 million ahead or our estimate, and improvement is directly related to inventory. Inventories at the end of the quarter were down 14 percent from last year. Inventories are quite clean both from a quantitative and qualitative point of view. We also believe that our inventory position in department stores is clean and that our stocks to sales ratios are in order. Our overall inventory position, together with our improved source structures should continue to significantly benefit, both the apparel and footwear gross margins in 2002.

Looking to fiscal 2002 we are currently planning flat sales for the year with sales in first quarter expected to be down six to eight percent. Sales for the second quarter are projected to be flat and sales increases of three to four percent in the second half of the year are expected to offset the first half sales decline. We are keeping our 2002 earnings per share broadcast to a range of 98 cents to a $1.03, which is a 14 to 20 percent improvement over 2001 earnings.

The seasonally weak first quarter is projected to have a loss of between five and six cents per share against last years two cents per share income. We're estimating that the second quarter earnings will be flat with the

year and are projecting second half earnings improvement of between 35 and 40 percent. Although we continue to remain cautious in our view of the timing and strength of the overall economic recovery we do believe that we have the ability to respond to a more rapid improvement in retail training should they incur. With that we'd like to open the floor for questions.

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Sir?

Yes, we're ready for questions.

The question-and-answer session will begin now. If you're using a speakerphone please pick the hand set before pressing any numbers. To have a question please press one followed by four, one your push button phone. If you would like to withdraw your question please press one, followed by three. Your question will be taken in the order it is received. Please stand by for your first question.

Our first question comes from

. Please state your affiliation followed by your question.

Lehman Brothers: Good morning.

Good morning Bob.

I guess, first of all, nice job with the balance sheet with inventories. I guess my first question for you Bruce would be as you look at the retail environment, out there, and you look at the inventories levels, sort of across footwear, apparel, and sportswear or dress shirts. Are you comfortable or do you think that the retailers are too under invested in product right now.

I think, if anything, they're under invested. Whether they're too under invested I have trouble saying. You know Bob, in my entire 30-year career every time there are under in inventories that people fail to make, in spite of inventories we've been making money, so I'm not too worried about that. And I, we, have the ability to react for the next couple or three months that we could etch our major selling periods of back to school through holiday.

I'd like to turn on the footwear side of the fence. Can you talk about, sort of, where you see things going and maybe what moves Diane has made since she's joined you guys? And sort of if there's any change in the profitability price that you have looking forward within the next year and 2002, 2003?

A little more paycheck.

We feel very confident about what has been happening in footwear side of the business. Most of what you saw this year predated Diane, but what Diane has done is help us recruit. And we're in the process of recruiting a couple of those young executives that we think will add a great a deal of support to the company and push us into the next direction.

In particular this year, we were well positioned in winter wear in boots and have really gone a mixture of market increase in profits associated with having the right product at the right time. In addition, generally speaking, that has more bad sellers on the floor than it has had in prior years and we good about that. So the outlook for this year is good when it comes to footwear and continued turn around.

Bob from the financial target point of view, we continue to grab the

. Long term products we believe that footwear segments can get back into the eighty upward and income margin that were just under 60 percent this year. And our target for fiscal 2002 is to be announced is about 60 percent based on improvements about six and one half percent operating income margins.

OK thanks.

Thank you Bob.

Our next question comes from

. Please state your affiliation followed by your question.

Yes, OK good morning.

Good morning Tom.

First question, with respect to your production of revenue increases in the second half on the order of three to four percent, how much of that, it seems like given the way the economy is evolving, given what we're learning about

investment in the year could do better. How much of that is just being actually caught as with respect to the economy or might there be pieces of business that were in the mix last year that won't be this year?

Tom from the point of view this middle businesses that were not in the mix this year. The leisure business, the dress shirt businesses are both really down to nothing this fiscal year but those are relatively small businesses. Other than that, we really think, we think that the three to four percent sales growth were talking in the second half of the year are reasonable targets at this point in time, if we saw businesses where we really thought we could capture more sales, particularly our own stores.

Back to school, in September and October periods if the economy were to come back there's real opportunity that we could struggle in that period like everyone else with certain

store deep decline. So that would be an opportunity if we could see the economy bouncing back. So at this point in time we continue to remain relatively cautious on the second half of the year until we seen more data as the year evolves.

With respect to dress shirts, based on what we've seen so far this year, based on whatever you might have observed that did magic a week or two ago, what are the prospects of that business? It would seem you're kind of coming out of a pretty deep hole there, how's that outlook shaping up for the year we're in now.

Dress shirts is, had a horrible year last year. Initial numbers indicate to us that the market contracted, by somewhere in the vicinity of just under 10 percent. There is all kinds of fashion stories that have marketing bouncing back, people dressing up, kind of clothing people think suits are going to be better.

I notice Men's Warehouse just made a statement that they are going back heavily into

clothing is going to charge their bids. I don't know what all of that means Tom. I'm pleased that we emerged with a very strong market here as we continue to lead the parade in a brand market with Van Heusen, with the design market of Geoffrey Beene, complimented by DKNY.

Our Arrow business is performing much better at PVH strategies take hold in the market

. So I think

will be very profitable for us, as it always is, generate a lot of cash for us, but will not get engine for growth in company. I think that's the best way I can answer your question. I think the market will probably grow somewhat next year. So I think maybe we have that in the cards for us.

OK last question and you mentioned there, it looks like you in acquiring Arrow, have a product you can sell through is working anything you can say about how you might follow up on that success and expand it?

Well, we're working very hard with manager at both

and

to broaden the profits absorbence. We've had some very positive conversations with our brand extension. There's a clear recognition by the management, both as a retail group as a true national brand type is a major role for them. So I am of course optimistic that we will be introducing new products programs and expand as we move forward if that's what you're referring to. I think you'll see more of that in the latter half of this year and next year.

OK great thanks. I'll let someone else jump in.

Thanks.

Our next question comes from Jennifer Black. Please state your affiliation followed by your questions.

Wells Fargo, and congratulations in its empirement. My first question has to do with I thought At Magic, your product looks absolutely sensational. And I wondered

to potentially taking market share from products such as

to name just a few I wondered what your vision is as to how big that business could become over the next three to five years?

Why don't I let our visionary take that and let Mark respond to you Jennifer.

Thanks.

Jennifer if you would go out and buy the GAP I'm sure we'd figure a way to sell

to you. On it's side your Izod are continued to be well received. We continue to see opportunities for new product launches. We have a soft launch going on this year with jeans and a number of our major customers have decided to take a shot at jeans.

Last year we launched, as you recall, the fourth quarter of the year, suits, neckwear and dress shirts in particular involved neckwear and dress shirts are accelerating dramatically this year. There's opportunity for other product launches as we go forward and so far the momentum is there. To put a number on it would be very difficult, but to say to you that we look to sportswear to continue to grow, and benefited from what you saw in Magic is where we are. We're going to figure out how to maximize that business.

It looks as though that you will be 500 million business quick in a couple of years out. Would that be your best shot?

I'd, you know Jennifer, we want to under promise and over deliver for you.

OK.

But I mean is that possible in a couple or three years, absolutely. There doesn't seem to be any cooling off of the enthusiasm about the

at retail.

My next question has to do with sorting and lead times. I wondered what kind of progress she's made as far as the reduction of lead times with excess capacity around the world.

Excess capacity market.

In the factories.

Yeah, markets, we've just concluded our budge meetings and markets been relentless with our operating divisions to make them show what it's like to be in a market where there's this enormous excess capacity.

So we're very comfortable with where our margin is gonna be next year from the goods end point. And we're getting some significant benefits and, as you know, we made a successful decision this year to close our last three owned facilities in the Caribbean because of the elimination of quotas compounding what you already said. And we can be much more efficient source of management. So that's pretty much in the bag. And PVH has a very long history of bringing local sources in and it's always been a competitive advantage for us.

So I think our video conference capabilities, our electronic capabilities, from around the world really permits us to be efficient in bringing goods in as short as possible lead-time. We do not believe in a huge tank

that we read about in the press all the time and on occasion some analyst reports contracting cycles and whatever. We believe our systems are not leading edge but cutting edge and get mixed variations so that's not part of our story to you. We're very efficient. We get goods quick as we think we can get. We get retailer sales electronically like everybody else does. I think that's enough on the subject.

OK and then there's one last question before I go. Could we see some licensing agreements going forward?

Yes.

OK thank you very much. Your product looks great.

Thank you. I hope you feel better than you sound.

I'm kind of under the weather.

Thanks for participating today Jennifer.

OK.

Our next question comes from

. Please state your affiliation followed by your questions.

Good morning everyone, congrats again on the fourth quarter. I'd like to follow up on Jennifer's question. What categories could Izod license, what would be ear marked?

We have a number of categories people are interested in and we are determining whether or not we want to be in those categories. One is leather goods, small leather goods. We signed licenses this for belts with one of our largest relationships with

which is Fort Humphries largest supplier of belts in the United States.

That deal hasn't been signed yet but they've, we've approved the product and they actually showed at Magic small but growing. There's an opportunity for leather jackets and coats. I'm trying to be convinced that one of three guys wear a leather coat in the winter and potential licensee accord us for that category. We think it would add some credibility and it would be a nice addition to what we are doing.

We have a soft launch going on with a license for Bed and Bath Company, which we're not going to talk a great deal about that. But we will tell you that for the Spring o three Izod bath towels will be launched in conjunction with our swim wear which has been pretty successful. And of course there's a question of women's and we have a lot of opportunity to launch a women's collection in Izod, whether we do it direct or we're leaning towards licensing that. And the only reason we haven't signed the license to date, because there have been opportunities is we're trying to find a substantial company who can build the business fairly rapidly and we are not there yet.

Great. I want to go back to the dress shirt market. You mentioned that the market can be

at 10 percent in 2001. First of all would you say that yours' self-contracted a little bit more than that? And the reason why I ask that is because if the retailers whittled down their inventory then your sales in the department stores then would have been a little be lower than the 10 percent. And also the inclination would be that the inventories are really, really low in dress shirts aren't they?

Why the inventories are really, really low in dress shirts in the traditional challenge of distribution and in our own warehouse, you are quite correct on that. We maintain market share but our business was off a little in department stores because we couldn't over cut on the total decline in the dress shirt market.

In addition we did not anniversary, as you know we knew

, for example, was not going to be in our stable of branch for an extended period of time and we we're exiting the

business and Sears was exiting the

dress shirt business. So a lot of the stuff was planned in reduction. I hope I answered your question.

Kind of. I do want to take it one step further. Why do you think stars are aligned so poorly, if you will, in 2001 against dress shirts?

I just think that basic for businesses people didn't buy. There was not enough new, different, whatever there for them to spend on. And I think it was just a simply low period. I think you can see a downtrend. We go through that periodically in dress shirts. The department stores, particularly when they

down negatively back to business because if you went to a dress shirt department, their inventories are lean, they were weak in sizes and colors and presentations, and that's not good

. I think the dress shirt business, as a result of a focus on the inventory manager, probably was hurt much worse than any other business.

Lastly you mentioned that the month of February was pretty good in your own stores. Could you talk about the

were for the fourth quarter prior to February and what they are now?

We expected our

to be down slightly but you said February?

Correct.

We expected them to be down slightly and we were flat.

And has that changed your outlook for the quarter at all, as a relation to your complex predictions as to the quarter as a whole?

Well yeah you see February was a relatively small month so we're continuing at this point in time to project

low single digits in the first quarter. As you recall last year's first quarter for us was by far our strongest quarter. We're up against some big numbers but it does give us some momentum going into March and that into Easter selling but I think it's a little premature to get ahead of ourselves at this point in time. The month just closed on Sunday for us.

As our fourth quarter comes, you asked the question, for about

, which is slightly better than what we planned as well. And that also gives us some borders and as we got closer to Christmas we're going to start

as well.

Very helpful thanks guys.

Our next question comes from

please state your agent followed by your question.

I too have heard very positive comments about Izod and

but, Mark or Bruce, maybe you can talk about your other lines and what you see are the potential there PVH, Arrow, Geoffrey Beene.

OK Van Heusen continues to have the number one selling sport shirt across America and it's wrinkle free and we see no sign of that slowing up to date. Van Heusen quietly continues to be above market performer for us. Of course the big news is our continued information of Arrow. It's a gauge and that business too is going dramatically. We have tremendous opportunity to build that brand in the three major stores we refer to meaning

,

, and Sears. And we feel very good about the business going forward and more importantly than that our customers are seeing to that.

Geoffrey Beene, which is the smallest fledging of our sportswear business, continues to show some signs. We're not convinced yet that that's going to be a big business, but we're very close to shaking hands for this fall on a major department stores and we'll know in the next couple of weeks whether or not that's going to happen.

So when all's said and done, yes Izod continues to grow and there's opportunities in both licensing and internal growth in new products. And the other brands, namely Van Heusen and Arrow are encouraging from what we've seen.

So imbedded in those projections that you gave for the year for sales what kind of increase do you expect in the total sportswear business?

You know over all Lee when you talk the apparel division being up for the year and two percent names, and sportswear being up about five percent.

Also included in those expectations what do you expect for comps embedded in the expectations for the second half of the year?

I think our comps are very similar to what we're projecting for the full year. Not per se we're playing the first half down, with low single digit comps, flat in the second quarter, and then we're expecting them to up in the three to four-percent range for the third and forth quarter. And anniversary September 11th and soft selling it right around there. So overall comps about one-and-a-half percent but clearly it goes back towards the second half of the year.

Thank you.

Our next question comes from Debbie Dowling. Please state your affiliation followed by your questions.

A quick question. I think you answered already was your costs are down two percent so what were your costs for the year, and also your exposure to K Mart?

We have no exposure to K-Mart.

Great OK.

And it should be under the

comps for the year were down four percent, footwear comps were flat, and apparel comps were about minus six percent.

And about the footwear apparel for the fourth quarter?

And footwear for the fourth quarter was plus one and one half percent and apparel was minus

.

Great thank you.

Our next question comes from

. Please state your affiliation followed by your question.

Hi it's

here on behalf of

. I was wondering if you could talk about the profit difference with your margin difference between shirts and sportswear and how that appears in your results?

Our overall operating margins are similar across our wholesale sportswear business, our wholesale dress shirt business, our retail

our operating margins are very similar. On the retail side of the house, as you would expect, our margins, our gross margins are higher. But of course of

the core expenses are higher than our wholesale model but blended they all come in at that target for the apparel segment is to be seven to nine percent and they all come in within that range between seven and nine percent. There's really not any difference between the bids on operating margin basis. It's how you get there. Lower margins on the wholesale side of the house with a much lower expense base. Higher margins on retail side of the house with a higher expense base.

OK, could you talk a bit about your sales

that you've reached on the wholesale side, what differences you've seen between say the moderate

and the department store business?

It's difficult for us sell coal and

here together for starters, but I would guess through the second half of last year the more moderate price positioned retailers did better than the higher priced position retailers. That's the way I would say it to you for last year. As you know one of the strengths of our company, and one of our strategies by design, is depending upon the brand to penetrate each channel of distribution and we've successfully done that. But businesses were more robust and the more promotionally priced channels at this point in time.

OK. So you've been performing consistently with the channels so where the channels have been better you've been better as well.

That's correct. Now I would have to say that in departments in the more, in the department store channel I hesitate, our brand positioning, with the exception of some of our high priced dress shirt brands, is moderate to upper moderate price. And I would argue that they've out performed the channel.

OK that's helpful. OK Manny, I wonder if you could just talk about gross margin and SG&A progression through the year to see how a couple of losing pieces of your factory closings and being

in footwear and so forth. And just what your expectations are for those line items.

Let me speak to the year first. We would expect the gross margins to improve somewhere between 60 and 120 basis points. To about somewhere in 36.4 to 36.8-percent range. We would expect SG&A on relatively flat plant fails to be flat up slightly maybe 30 to 40 basis points.

Overall these margins, operating income margins should be about five percent after corporate expenses. We would expect, if the progression on the corporate sales line we'll start to see significant improvement. The more so on the back end of the year. But we will continue, I believe, to get improvement in the first half of the year, particularly in footwear area, and in clean inventory and approve sourcing base.

The dress shirt improvement should really start at the end of the second quarter through the balance of the year. And we are experiencing sourcing benefits from costing point of view over all. With the excess capacity we are getting sourcing benefits from a costing point of view and that should continue throughout the year.

So we should see marked improvement in gross margin throughout the year particularly in the second half of the year. SG&A will rise slightly in the beginning of the year on negative sales trends in the first quarter and should start to level off as we get to the second half of the year. So that's the way we see it progressing.

OK so you'd expect to see a gross margin improvement basically throughout the whole year.

Yes that is correct.

I guess on the first quarter would be interested in any idea of how much of the down sales and down earnings is, because last year was so strong versus how much is, a particular environment this year.

I think we feel last year was very, very strong and I think that the vast majority of what we're up against is very tough business. In our dress shirt area, we are continuing to work through the Arrow situation in the first quarter. So we had a fair amount of sales in Arrow that were at losses to break even so that will also be something we need to see in gross margin. So on sales line the six to eight percent declines I think the majority of that you'll see on the apparel side of the house and more of that will be in the dress shirt area than would be in the sportswear area.

Also from a wholesale point of view are just very tight and we've talked about this now the last three quarters, very time in their offer to buy and they came in spurring 2002. And we see less promotional activities happening with

. I think they're trying to improve margins overall. We see in our business that it sells and it's being done on less inventories. Inventories we've channeled on a balanced apparel, a dam, depending on the chain, anywhere from five to 15 percent on a sale plan that's relatively flat at the department store level.

So we're turning our inventory much quicker in department stores and I think that'll improve our seller through on gross margins over all and mark down requirements at the end of the seasons in department stores. So I think that will be the benefit of it and it will be done on tighter sales.

How much over all of your business is EDI versus backlogs.

On our wholesale dress shirt business about 60 percent of our business is on an EDI basis. And our sportswear

business, in our sportswear business it's about 30 percent is on a replenishment basis. So say over all in our wholesales business it's somewhere between 45 and 50 percent and as you know we're about even about 60 percent wholesale compared to retail.

Right. How's your backlog being

.

Our backlog right now for this season, we're slightly ahead of where we were the last year and we seem to be moving forward as we go particularly in sportswear.

OK that's great. Thanks for that.

Again our next question comes from

. Please re-state your affiliation followed by your question.

Manny could you go over the cash flow items for o one and potential o two

your need for additional working capital, if any, this current year.

Sure let me start with o one. We ended the year free cash flow of $23 million. We had projected about 10 to $15 million in free cash flow so we beat the number. It was really down in two areas our cap x came in at $33-and-a-half million. Our depreciation was $25.7 million and inventory was significantly down that's where the advantage we are. Cash flow from operations was about $63 million. I think that fills in the blanks so we came in about $23 million.

Looking out to next year we see cash flow from operation of about 65 million. That's before restructuring, funding of restructuring of about $10 million. We're planning PP&E in the neighborhood of 34 million, 33 to $34 million. Depreciation and amortization should be about $26 million next year. We put it all together it will get you all around to a $15 million free cash flow after funding about $10 million of the restructure charge.

So how much of the restructuring is a cash related item?

Of the $21 million about $18 million is cash related.

So do you take the balance for that 10 million went?

The balance went in the fourth quarter of this year.

OK thank you.

You're welcome.

Ladies and gentlemen, as a reminder, should anyone have a question please press one followed by four at this time. If there are no further questions, I'll turn the conference back to Mr. Bruce Klatsky.

Thank you all for participating. We'll look forward to talking to you at the end of the first quarter. Have a great day.

Ladies and gentlemen that concludes our conference call for today. Thank you all for participating and have a nice day. All parties may now disconnect.