PVH Corp (PVH) 2002 Q2 法說會逐字稿

Good morning, ladies and gentlemen and welcome to the Phillips-Van Heusen corporation second quarter earnings release.

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At this time I would like to inform you that this conference is being recorded for rebroadcast and all participants are on a listen only mode.

At the request of the Company we will open the conference up for questions and answers after the presentation.

I will now turn the conference over to Mr. Bruce Klatsky.

New for joining us.

I'm here with our President Mark Weber, Manny Chirico, our CFO.

We are as we indicated in the release of last night quite pleased with our performance through first half of the year, particularly the second quarter.

Our dress shirt group continues to do well and outperform the competition at retail.

The surge we are experiencing in our sportswear group continues as led by Izod as its performance at retail continues to outperform the competition on a sell through basis.

We are quite pleased with that and the broadening of the product offerings that we are experiencing there and Bass footwear division continues its quarterly improvement driven by the steps we have taken in the past couple of years.

And the installation of our new Vice Chairman Diane Sullivan in that division, we quite pleased there.

I don't think since we have owned Bass we have performed this consistently in fulfilling our order book as we have in the last quarter, so we are quite pleased there.

Our outlook for future has to be cautious as we look at the projected third quarter sales and what we experienced in July and August.

Back to school and across the board and all channels of distribution have started quite slowly, many are attributing that to whether that may be the case.

I don't care what is causing it, except the consumer doesn't seem to be frequenting the retail stores regardless of channel of distribution.

We are hopeful which things cool off a bit across the country sales will pick up.

That is the negative news on the outlook.

The positive news on the outlook is the inventory pipelines are as clean as I can ever remember them.

Both at the retail stores, our own distribution centers.

We are very, very clean.

So I'm cautiously optimistic that regardless of the spending level for consumer by the balance of the year, we should be able to achieve the earnings guidance that we just increased and you have in front of you now for the entire year, increasing our sales projection for range of $1.05 to 1.08.

We feel quite good that because of strong inventory position we find ourselves in.

That has largely resulted in the flows in our balance sheet, we quite comfortable with that and we continue to occupy ourselves with looking at acquisitions that we can lever into the three strong infrastructure that we have to accelerate top line growth which we continue to be will be in the 4% area as we look forward and bottom line in 10 to 15% area.

So I think we are feeling quite good here.

I need to make a comment about the environment we find ourselves in in business in general, and some of the negativism that seems to exist regarding corporate conduct.

I'm pleased that for me personally and our management team those issues of integrity, how we report our numbers, how we conduct ourselves in the communities we operate has for way over 100 years been the cornerstone of PVH, a predicate to anything we do in business, so while I'm angered by the actions of some of my fellow CEOs around the country, I can asure you that does not exist at PVH.

We will be very active as I have been at the World Economic Forum and Business Leaders Forum and Business For Social Responsibility leading the charge that the bad apples get thrown out rapidly and punished severely.

We will of course, within 45 days be signing off on the required documentation certifying our results.

It is frankly embarrassing for Manny and I that that needs to be done, but it needs to be done because it is the law and we will of course do it.

But I'm proud to say that it certainly isn't necessary here at PVH.

So with that I'll turn over the microphone to Mr. Chirico.

Thanks, Bruce.

As he said we are pleased with our second quarter results, which were 3 cents ahead of our previous guidance .

Sales in the second qater were down 1%, which was in line with previous guidance.

Sales declined in the quarter and first half relates to a planned reduction in promotional and clearance dress shirt sales.

In the apparel segment, despite a 2% sales decline, operating income in the second quarter increased 12% to 15 million.

Operating income margins improved 80 basis points to 6.4% from last year's 5.6%.

This improvement was due to higher gross margins which were the results of lower overall product costs and more full price selling.

As are significantly lower inventory levels resulting in less clearance and promotional sales.

Our footwear segment continued its financial turn around.

Where we were able to leverage a 3% sales increase into an 8% increase in operating income.

Footwear operating income margins improved 50 basis points to 8.9% from last year's 8.4%.

Net income in the quarter was 7.9 million or 28 cents per share, which was 3 cents ahead of consensus estimates and compared to last year 7 million dollars or 25 cents a share, an overall increase.

From our balance sheet perspective, an improvement in net debt position over the prior year of about $107 million as we generate significant cash flow.

We continue to effectively manage our net assets, especially inventory, which was down 24% from the prior year.

The improvement has had a meaningful impact on interest expense in the first half of the year and favorable interest rate comparisons expected to continue into the second half.

Look out to the third quarter, we are estimating sales for the quarter to be up 1 to 2% with earnings per share projected to be in the 60 to 63 cents per share range an overall improvement of 33 to 40% over last year's 45 cents a share.

We are increasing our 2002 earnings per share forecast for year to a range of $1.03 to $1.08.

An overall improvement of 20 to 25%.

Valleys expected to be flat for the year as sales increases in the third and fourth quarter are expected to offset first half sales declines.

We also continue to estimate our free overall cash flow to be in the range of 20 to 25 million for the year.

With that, we would like to open up the floor for questions that you might have, that Bruce and I can take.

Let me correct something before we take the question.

That, I said we are increasing our forecast from 1.05 to 1.08, Manny is as usual correct, it is 1.03 to 1.08, increase.

Okay, we will take questions now,.

Thank you.

The question-and-answer session will begin at this time.

If you using a speakerphone, pick up the hand set before pressing any numbers.

If a question, please press 14 on your push button phone.

Should you wish to withdraw your question, please push 13.

Your question will be taken in the order received.

Please stand by for your first question.

Your first question comes from Bob Drbul please state your affiliation.

Lehman Brothers.

Who is this?

Bob Drbul.

Hi, how are you.

Nice quarter.

A couple of questions.

On the gross margin line, pretty impressive showing.

Your thoughts on gross margin the rest of year, sustainability of that level of gross margin and expectations for full year and then Bruce, on the footwear side of the fence, if you could give us the Izod own footwear launch and where that stands and your expectation.

On the gross margin we benefiting from two key issues, overall product benefits.

Particularly in the dress shirt area.

We announced that we were closing three dress shirt manufacturing facility in the Caribbean.

That took place in the fourth quarter and product benefits associated with that came in the second quarter of this year.

The second point is significantly less promotional and clearance selling going on, benefiting from a much tighter inventory levels from this time last year.

Both are inventory and the pipeline inventory.

Look out, we are projecting gross margin improvement in 150 basis point area over last year, both for the third and fourth quarter.

To give you a sense of where we will be coming out for the second half of the year.

I think we will be in the 150 basis point improvement for the year.

There was shoe show that took place early in the month and Izod was extremely well received.

Izod as some of you know or don't know is being launched in men's and women's footwear.

The line and recognition of the brand was very strong.

And we believe that rolling forward the Izod business will be a substantial addition to the Bass footwear business.

Just commenting on the new introduction of Izod and we are cautiously optimistic.

It is just not clear to me how big an impact, whether it is going to be niched or broadly distributed.

The Izod trademark is very valuable us to.

And we will be cautious how we sell it.

Let me add, I forgot to announce something that we are pleased about.

We announced a license agreement with Calvin Klein to launch a Calvin Klein range of dress shirts.

We will start shipping that in the fourth quarter of this year.

We will see how -- we will price position it in the $40 to $50 area so my guess is that will have an impact on our dress shirt business of something like $20 million.

So we feel good about that and it of course prevents the competition from getting their nose under the tent.

I just wanted to mention that as well.

Great.

Thanks.

Thank you, Bob.

Your next question from Tom Lewis.

Please state your affiliation and your question.

Yes, good morning.

CL King.

Another nice quarter.

Thank you, Tom.

First question though.

Can you shed light on why the SG&A expence up as much as it is?

Yes, two issues.

One is basically some timing of some corporate and logistical expenses.

We had to plan this way for full year the flow of those goods.

We would expect SG&A expense for the year to be up overall 4 to 5% for the full year.

Part of that is mix of business.

As our sportswear business continues to accelerate and grow in comparison to both our footwear and dress shirt business, that business comes with it with a high gross margin and also comes with a higher overall expense level, particularly on the selling and marketing side.

So really, a big piece of it has to do with mix of business.

Some timing in the second quarter on expenses on a logistical basis.

But sportswear continues the healthy growth that we are projecting, the higher expense level associated with the business.

Could we assume that there is nothing in your year ahead guidance for balance of this year, there is nothing from the Calvin license?

We will ship in the holiday, we will deliver in store in November, it will be in the $2 to $4 million range, the sales, more or less trying to get out to air major customers.

Okay.

And can you give us a sense of you know, assuming that you on target earnings wise, how you expect your cash balances to end up this year assuming you don't make an acquisition or anything like that?

Yeah, we should -- we continue to give guidance and will generate about 25 million of free cash flow.

That is a range of 50 -- 55 to 60 million of cash flow from operations.

Cap ex should run about 30 to $32 million.

We have dividends and this should give us a range of 20 to 25 and in the bank between 60 and 07 million dollars would put in combination with our credit in a strong position to do any kind of acquisition that we would like to do to fill in the business.

Okay.

Last question to the point of acquisition.

Bruce, can we assume that things have settled down enough in the last few months that sitting down and discussing potential acquisitions is more productive than it might have been a few months ago?

Yeah, I would think that is correct.

But as you know, Tom, we are very, very cautious and we are not going to anything to disrupt the positive earnings growth we had.

We would like to get the top line in and increase the bottom line but don't want to do anything that goes the other way.

So yes, there is an environment where productive discussion can be head had and appropriate financing seems to be available us to because of the regard that our management team has held.

And so that is -- I guess, really all that I would like to say on that matter.

I don't feel -- I wont allow us to feel extraordinary pressure to get a deal done.

We want very much to but if we feel too much pressure, we will make a mistake.

Great, thanks a lot.

Thank you, Tom.

As a reminder, ladies and gentlemen, should you have a question, please press 14 at this time.

Your next question comes from Jennifer Black.

Please state your affiliation followed by your question.

Wells Fargo and congratulations, you guys.

Thanks, Jennifer.

Did you guys talk about the comps for your retail stores?

No, we didn't specifically.

But I will.

Our comps for the second quarter ran about minus 2%.

We are projecting comps for the year for balance of the year to run about plus one 1/2 to plus 2% overall with the significant improvement beginning post September 11th as we start the anniversary -- the declines that we experienced last year, particularly in the period September through November.

So that is where our comps wound up and consistent across all our chains.

Okay.

And do you see any kind of change in the merchandise mix you will be offering in the Bass stores?

The Bass stores look great.

I saw racy ad not sure if I saw it in Mackim

But can you make a comment.

This is Mark.

The ad you saw is the first one we ran.

We started it in fashion for women.

We are pleased with what is in the Bass stores now.

We like the way the product looks.

The balance between boots and regular footwear is work extremely well in womens in the diversity.

Complimenting products and accessories are work well and we have been doing extraordinarily well with the women's sector of the product.

So in answer to your question, I think we understand right now who Bass is, I think we have been servicing the customer now for close to two years well, and we feel good about what is coming and the results to date.

Weather could help us a little more, but any retailer that talks about weather that you hear from you ought to run away from, but weather is an issue, but short of that, we feel good about Bass.

Do you foresee in the Bass stores, because I have been in the Bass stores as of late adding more small leather goods, accessories, belts, purses, those types of things as footwear becomes stronger and stronger?

Well, we always look at the mix of accessories and other products in the store, and those we find to be turn the quickest and offer the most profit will always invest more in.

Right now our business is good, not great.

And we are seeing better results in some other categories that we will fund.

Okay.

And then one last question.

I wondered if you could speak to the channels of distribution in the dress shirt business, your growth with some of the different retailers in the mass channels and what you would expect for the balance of the year.

We manage the channel of distribution very carefully.

One of the strengths of the company is the multichannels of distribution.

The way we do that as you know is brand segmentation.

Talk about mass or aggressive retailers, if you will, you I'm sure remember that the motivation for the acquisition of the arrow brand a year or so ago was its penetration at Cole's and Sears and confidence that we could do a better job.

That appears to be happening.

Our sales are rapidly growing at Kohl's and we think there is still a lot of room for more growth, particularly at Kohl's and we are cautiously optimistic that we can do the same thing at Sears.

See we are optimistic about that channel

And lastly Bruce or whoever wants to take this, the rollout of Izod pants.

I wondered how that was going, if you could speak to that.

I think the big picture here is that we have been successful in any of and all of the new introductions that we have made within Izod.

Over the last few years we launched pants and shorts and we have an important and growing business.

As you recall, we have recently had a soft launch on jeans.

Right.

The idea that there are plenty of jeans for young men but there aren't many choices for men and the Izod Jean aimed at a man with a man's fit is being very well received.

We believe that by the end of this year, we will have a number of very good programs in jeans which would incorporate not only jeans themselves but jeans tops and the retailers are finding room for us.

They are allowing square footage to allow the products to come out.

We are cautiously optimistic about the pant business.

We believe that it will continue to grow and we are overall very comfortable with the response we are getting to either new licenses we sign in Izod or new product introductions that we ourselves handle.

So it feels right and it seems to be benefiting the Company, the brand and ultimately the bottom line.

Great.

I'm looking forward to seeing everybody at Magic.

Good luck.

See you there.

Operator: Your next question comes from Fiso Allaby.

Financial Management Advisors. Just a couple of housekeeping items.

Can you tell us what capex was year to date?

Give me a second, please.

About eight and a half million.

And dividends?

About $2 million.

Can you tell us what cash flow from operations was?

Let me give you the overall cash flow.

You know where I'm driving.

Overall operations was 45 million, D&A, about 12 1/2 million, Cap ex was about 8.5 million and dividends were about 2 million dollars, for overall change in cash was about $36 million.

All those numbers were all year to date, correct?

Yes.

And availability of --

We were at a cash position, we weren't borrowed under the revolver at all.

The only piece were for letters of credit and that was about 140, to 150 million, so we had availability of another 175 million under that, plus our cash balance.

Okay, great, thank you.

Next question comes from Greg.

Please state your affiliation.

Lord Abbott. Yes, nice quarter.

With regard to inventory, you saying it is very clean in the pipeline.

What if we were to see strong demand say near term on back to school, could you give me a sense of how you can react in such situation?

You know, we have got a very efficient sourcing line, Greg but we have got basic stocks available to satisfy our sales need and then some for the back to school period on the basic Izod or basic boots or basic dress shirts.

And then we could probably react later in the fourth quarter if we saw a real pick-up in business.

But I'll be very happy if we run out of inventory.

Good.

Also, a couple of years ago you gave us a range for Bass margins at 7 to 9%, close to the top end of that.

Is that as far as we can go?

Well, the number the 7 to 9% is an annual number.

Second quarter is historically a strong quarter for them as the third quarter is.

But an annual basis we continue to be projecting, for this year, about 6% operating income margins for the footwear division, and we think that could get stronger as we go forward particularly into next year, we can get closer to the 7 and start to work our way back to historical levels of profitability.

So again, the 8.9% is seasonally adjusted, but overall this year, we are targeting somewhere between a little over 6, to 6 1/2%.

So there is still room for us beyond that as we go forward.

Okay.

And with regard to Izod, you have now women's shoes.

Do you expect to have a full women's line there?

We have been deciding for a period of time as to what our rollout of women's will be in Izod.

As you know, we have a licensee for Izod Club, which is the golf division which sells to resorts and pro-shops around the country.

And the women's component of that business has been extremely strong.

On having analyzed the situation for a period in time, we have decided we will license our women's business but we had a number of conversations with a number of large companies.

We believe that it is a real opportunity but we are not prepared to announce that our ultimate goal will be there.

But you will in fact do that for apparel?

That is correct.

We have every intention to launch women's apparel.

Okay, good.

And I heard the word acquisition twice from your side of the telephone conversation here.

With respect to possibilities is the range of areas that you look at still the same or could we -- could the area where you examining candidates possibilities perhaps be a little broader than it has been in say the last year or so?

I'm not sure your orientation is to where we had been looking in the past, Greg.

But essentially, we are looking in the apparel and footwear arena.

So very broadly, pants as well as shoes and all areas of apparel?

Where we can leverage the management team and the infrastructure that PVH has, that is where we are looking.

Same theme.

We are committed to acquiring only a strong brand.

We don't have a great deal of concern if the reason it is available is for logistics or infrastructure problem because we would eliminate that and merge it into PVH's groups and we have no desire to fix anymore brands.

We would only acquire something where there was a strong consumer recognition.

And finally, last question, is dividend ever discussed at the board meetings in terms of raising the dividend?

Dividends are discussed regularly at the board meeting and the discussion and there is regular discussion was to whether or not we should increase the dividend.

Is that a possibility in the near term?

It is a regular discussion, how our directors view it, I don't know.

I think generally, we view people who own our stock or in it for stock appreciation and whether or not the dividend is in is a matter of dialogue that we have almost at every board meeting.

I don't want to prognosticate on what we will do.

Thanks very much.

If there are no further questions, I will turn the conference call back to Mr. Klatsky to conclude.

Thank you for joining us.

We are comfortable where things are.

Wish you all a good third quarter and speak to you at ten end of third quarter and of course Manny and Pam or Mark andry always available for your calls.

Take care now.

Ladies and gentlemen, that concludes our conference call for today.

Thank you for participating and have a nice day.

All parties may now disconnect.