PVH Corp (PVH) 2002 Q3 法說會逐字稿

Good morning and welcome ladies and gentlemen to the Phillips-Van Huesen corporation third quarter earnings release.

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

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

At the request of the management of PVH, the following statement is being read.

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The companies future results of operations could differ materially from historical results or current expectations as more fully discussed in our Safe Harbor Statements found in our SEC. filings.

The company does not undertake any obligation to update publicly any forward looking statements including, without limitation, any estimate regarding revenues or earnings or as the result of the receipt of new information, future events or otherwise.

I will now turn the conference over to Mr. Bruce J. Klatsky, Chairman and Chief Executive Officer.

Please go ahead sir.

Thank you, good morning everybody.

Thank you for joining us.

I'm in Europe attending a board meeting for our joint venture with [LDMH for the Gant brand].

I'm joined on the call by my colleagues in New York, Mark Weber, Emanuel Chirico, Pam Hootkin .

I would appreciate if you have questions at the end of the call, Mark and Manny will handle them from New York.

If you have anything specific for me, then address it to me and I would be happy to take them and answer the questions.

But, just for logistics, I think that will be easier.

Relative to the performance for third quarter YTD, we're quite pleased with our apparel business.

It appears to be outperforming the segment and channels of distribution in which we are in.

We are very comfortable with what's going on.

Both in terms of our sell throughs, our sales, and the margin improvements that are realized because of appropriate controls of mix of regular price and off price and sourcing adjustments we made last year.

So we are quite pleased there.

We were disappointed with our footwear performance but that seem to be consistent with the footwear environment.

The good news is that has picked up significantly beginning in October and on into November and we are cautiously optimistic the comparisons for the fourth quarter will be positive compared to last year in this segment as well.

For the year, what can I say, the consumer appears to be almost schizophrenic.

There are stops and starts.

It's strong and weak.

We think it is prudent for us to be cautious as we look out to the fourth quarter and into next year.

Therefore we are planning quite conservatively for the fourth quarter and our outlook for next year is on the conservative side.

I should say on two strong notes for us , one is I am extraordinarily pleased with the deal we structured with Kellwood launching an Izod women's sportswear collection.

We think the opportunity is significant and should impact our earnings in 2004 forward, so we are quite pleased with that and Mark is quarterbacking that, overseeing the establishment of that operating unit for Kellwood and we think that could be great for the brand and great for PVH’s earnings.

Finally, but importantly on the balance sheet side you can read the numbers, our financial team guides us there and our performance there is very strong and gives us great comfort to see the strength that resides there.

Before I turn it over to Manny, I think I should say to you I have read, as you probably have The Wall Street Journal, the New York Post , The (inaudible) daily articles concerning PVH’s potential acquisitions, I would appreciate if no one would ask us questions in that regard, because consistent with our history and forever that I’ve been with the company over 30 years, we don't respond to anything that’s rumors whatsoever.

So with that I will turn the call over to Manny.

Thanks, Bruce.

As Bruce said we are quite pleased with our third quarter results, came in at the high end of our expectations and guidance that we had given (inaudible) .

Sales in the third quarter were up about 1 percent, which was in line with previous guidance.

The improvement in sales and earnings was driven by the strong performance of our apparel segment.

In the apparel segment third quarter sales increased 3 percent.

While operating income increased about 40 percent to $30.8 million.

Apparel operating income margins improved 250 basis point to 9.8 percent from last year's 7.3 percent.

This improvement was due to higher gross margin which were the result of lower overall product cost and more full-price selling as our significantly lower inventory resulted in less clearance and promotional selling.

Possibly offsetting the strong results of the apparel segment in the quarter was performance of footwear segment .

They had experienced a 6 percent decline in sales while operating earnings decreased 24 percent to about 6.6 million dollars.

Soft back to school selling season coupled with unseasonably warm weather throughout the season negatively impacted sales in gross margins as higher promotional mark downs were needed to drive footwear sales.

Overall net income in the third quarter increased 40 percent to 17.7 dollars million or 63 cents per share.

Versus last year 12.6 million or 45 cents per share.

Our balance sheet shows an improvement in our net debt position of prior year of over $91 million as we generated significant cash flow.

We continue to effectively manage our net asset, especially inventory down from 17 percent last year, this improvement has had a meaningful impact on reducing interest expense.

Given uncertainty in the overall economic environment and 6 fewer shopping days between Thanksgiving and Christmas this year we are cautious of our view for the fourth quarter, we are estimating fourth quarter sales to be flat up to 2 percent compared to last year with earnings per share projected to be 15 cent to 20 cents per share compared with last year's 14 cents per share.

As such our 2002 earnings per share forecast remains at 1.03 to 1.08 compared to last year's 86 cents per share was represented 20-26percent increase over the prior year.

Looking to fiscal 2003 we believe it's also prudent to be cautious.

We are projecting sale to be flat to up to 3 percent and earnings per share to be in a range of 1.10 to $1.20 per share .

With that, Raul, we would like to open up the floor to questions.

Thank you, the question and answer session will begin at this time.

If you are using a speakerphone, please lift the handset before pressing numbers, should you have a question press star one on your push button telephone.

If you wish to withdraw your question please press star two.

Your question will be taken on the order it's received.

Please stand by for your first question.

First question comes from Tom Lewis.

Please state your question.

Yes, good morning.

Nice work all things considered.

Manny, could you give us a sense of how elements of working capital are going to trend over the balance of the year will -- inventories going to come down?

Receivables and all that?

Sure, Tom, I guess looking on the balance sheet, we would expect inventories to be down around 4-6 percent over last year's levels.

As you recall, by the end of last year's fiscal year our inventory was down in the 18-20 percent range.

So we believe we can further get those inventories down about 4-6% .

We believe receivables will be down 7-9 percent.

That has more to do with the timing of sales which we believe will be happening earlier this fourth quarter than they happened last year's fourth quarter a lot of sales were taking out at the fourth quarter last year.

Overall, we feel we are in decent shape there.

Okay, I guess my other question is if anybody would care to take a shot at how big we might expect an Izod women's label if we give you 3 or 4 years to handle it.

Mark will handle that.

In our view, women’s wear and Izod should be bigger than men's over a 4-5 year period.

However the business has to be formulated, the people have to be hired and ramped up.

An estimate we would be comfortable with over five years would be $250 million.

Thank you.

Thank your next question comes from Margaret Mager .

Good morning, how are you?

I have a quick questions and Caroline does too.

My question is, I was just wondering in the footwear business at this point, how much is sort of in your own factory outlet distribution versus wholesale just to get a sense of how the complexion of that segment of your business and I'm just wondering how those two pieces are go doing compared to each other.

Yesterday Janessa was saying their (inaudible) branding wholesale distribution was down 17 percent.

So I'm just trying to understand a little more detail on your footwear business.

Sure, Margaret, from a footwear sales point our business is about 50/50.

When you look at outlet retail business, our outlet retail business has had a difficult third quarter from the -- especially from August and September and the back to school selling period.

The business came back rather strongly in October where we had positive comps, in the month of October but overall the third quarter was disappointing against plan and last year overall.

Our wholesale business has trended more positively than that and we see more reasonable results, nothing like what Johnson and Murphy has seen and our wholesale business has been relatively flat both from wholesale and retail point of view.

Okay, what kind of status on the Izod footwear ?

It was a soft launch for fall with major effort for next year, we’ve delivered some shoes and we’re waiting to see results, but the real ramp up for Izod footwear will be next year.

Response has been positive about the business and we're waiting to see improved sales information.

What's critically important to the women's side of the line is that we have announced we have a women's licensee for apparel.

So we believe that will have a positive effect on our ability to sell women’s (inaudible). --

Right, I'm just wondering in the analysis of the sluggishness of the footwear business, is there anything product-specific you would point to, or do you really just feel it's traffic in that factory outlet channel?

I'm just curious the women's versus the men's.

In your whole sale distribution it's largely men's footwear whereas in the store you have a lot more womens.

Am I wrong?

No, you’re not wrong.

In the wholesale distribution it's about 40% women to 60% men’s and retail it's about 50/50.

The real impact we’ve had in soft back to school was soft to begin with, I think everywhere.

Footwear tends to be more impacted than apparel for back to school selling and we were very much hurt with warmer weather, particularly August, September that hurt our boot business and outdoor business at that point in time.

As we got into October those businesses bounced back sharply.

We just couldn't make up for the August and September time period, that's where we really took a hit from a sales point of view.

Is it mostly womens or men or both in sort of this outdoor…?

It was both.

As we’ve said, the weather changed, we are feeling better about the results of consumers voting .

We had positive comments to the advertising we’ve been running in some of the women's fashion magazines and have been getting a significant number of calls asking about the footwear they are seeing ..

I'm surprised that back to school means that much to you, because when I look at the mix of the footwear business over the four quarters it seems it's pretty evenly split -- I also think of Bass’s position targeting a little bit older customer versus that classic teen back to schooller.

In our outlet retail channel which is a substantial piece of our business, the August time period is a big shopping period for retail.

That business in and of itself just by the traffic patterns with vacations and whatever gets driven very substantially in August, so that's where we took our biggest hit in the whole quarter with the month of August, pre-Labor Day weekend.

And that was impacted both our footwear business and apparel business in the Bass stores.

Okay, I know Caroline wants to ask you some stuff too, but I want to ask about your balance sheet, and I know Bruce says don't ask us about acquisition what is your tolerance levels on interest coverage and debt.

What would you not go above?

In general, we would like to maintain our capital structure on a percentage basis as much as possible.

And we would be willing in the short-term to take on some extra leverage in that desire.

To take on some extra leverage in the short-term to do the right strategic acquisition especially one that could transform us.

From interest coverage point of view, I guess today we are -- looking out again, I guess it's a similar story, we would be willing to take on additional coverage and today where our interest coverage, EBITDA is running about 4.5 to 5 times we would be willing to go down to 3.5 to 4 times for a short time to do the right strategic positioning for the company.

Margaret this is Bruce.

How are you?

Great, and it’s interesting sitting here listening so I want to make sure everybody heard Manny correctly.

As we accumulate cash our net ratios improve.

We wouldn't be comfortable with ratios weaker than 50/50, would you concur Manny?

Yes, more or less.

O.k.

That’s very helpful.

Thank you, I will let Caroline jump on with her questions..

Hi, I have a couple of questions.

Could you just talk about the different brands in apparel, how they performed in the quarter and what were your comps in footwear for the quarter?

I don’t think you mentioned that.

And also the tax rate, if that's going to be a sustainable benefit you will see going forward, particularly into next year as well.

I will answer the financial questions and turn you to Mark.

I guess I will start back with the tax quester.

The 34% tax rate we believe will be for the balance of this year and going into next year as well.

Comps for the quarter for our four retail divisions, average between minus two and minus four percent.

And the footwear segment was on the minus four percent.

On the branded side, venues in brand, in particular is doing extraordinarily well, shirt penetration for department stores is growing and sell troughs and the dress shirt brands is nothing short of sensational in this marketplace .

Using sportswear with wrinkle free is leading the charge is performing very, very well.

Izod continues to go on it’s share of the market in main force sportswear and the combination of very strong brand.

With national presence in advertising and some really great product is doing well and out performing many of the other people on the floor.

It's not a robust time at retail, but we feel we are doing better and best of breed on those channels and stores we are doing business with are telling us that.

With about a minus…in the apparel segment with about a minus 2 percent comp, 3 percent sales increase all came out of the wholesale side of the equation.

Dress shirts to a degree, but sportswear business is really driving sales increases, Izod, Arrow and Van Huesen.

Is sportswear out performing dress shirts?

Dress shirt is performing well, it’s up one to two percent compared to last year, but much cleaner business and we see that in the margins, there was a lot of clearance sales going, we had to liquidate inventory in the third quarter of last year post 9-11, this year we have had very little clearance promotional selling at whole sale and all the dress shirt sales have been basically, from the vast, vast majority has been full-priced selling.

In sportswear where we have continued strong growth the last four years, we've just continued that momentum in a difficult environment, so we put on a larger sales increase in sportswear than dress shirts.

O.K great.

How’s your inventory on footwear (inaudible) ?.

Even with the sales the footwear is right on plan, we are real aggressive in the quarter, move goods and take the appropriate mark downs from a promotional point of view to move the goods out quickly.

And we're very comfortable as we go into the fourth quarter in our inventories that we are well positioned both quantitatively and qualitatively.

Thank you.

Did that answer your question?

Yeah.

Thank you, your next question comes from Jennifer Black.

Good morning and congratulations in a tough environment.

I wondered if you could tell us how much you are spending on advertising as a percent of sales and how that has changed since last year, I've noticed great ads.

It seems you are advertising almost everyday in the New York times.

That's my first question.

We are spending approximately $40 million a year all considered in the marketing effort, Jennifer.

And we are up approximately 10 percent on the year.

What you also should realize is every time we sign a license with one of our new partners there's a significant new advertising commitment which is helping to build our coffers to be in the marketing area.

The fact you are seeing more of it the fact that we are very committed to doing what we are doing and building our bank, if you will, to advertise.

It's been great advertising.

Second question would be, is there anything new on the sourcing front that we should be looking out for over the course of next year?

Well, as you know, last year we took a charge to close three facilities that we had in the Caribbean which Manny said earlier are helping improve our bottom line, but as we go forward, we are well positioned to sources around the world, you know we have offices in very many of the countries that are the lead-producers around the world.

And at the same time, we're very, very involved with what the future is with all the trade agreements and adjustment of quotas and duties around the world.

So we are positioned very well, on top of details and for us it's business as usual.

Just to quantify what Mark has said.

We're looking for the year, this year, our gross margins will be up about 150 basis points year over year.

And next year when looking out we would expect them to be up about 50 basis points, so the full benefit of the factory closing and sources information we will get the full benefit of that next year.

That's what you will see in the numbers next year.

Okay, and then my last question would probably be for you Mark in regards to men's dress shirts, are there any new trends that you are seeing.

I saw all your lines at Magic, I'm just wondering if there's any changes you see in the competitive landscape and how your position, gaining space from some weaker competitors and department stores?

In particular, all our brands are doing well now.

With the addition of Calvin Klein , we are pleased with the growth opportunity we are seeing happening , and the fact we are purveyors of the best designer brands in America.

We are positioned really well.

They don't compete with each other, they compliment each other.

And all brands are doing well.

Geoffrey Beene is still the mother load with the largest share in designer and performing very well at their price points.

Calvin Klein has come on and it will probably be one of the quickest growth spurts we’ve ever had in a launch.

And Kenneth Cole, we are pleased to announce that at regular price that business is performing on or better than planned consistently.

In the case of our brands, the Arrow shirt brand in Kohl's is enjoying the kind of growth that Kohl's is enjoying.

The sportswear at Kohl's with Arrow brand is equally enjoying the success.

And launch of Izod is working and it will be a 20 million dollar plus dress shirt.

In a lot of advertising we are featuring dress shirts and neck wear and clothing in Izod, hopefully for clothing you don't normally see for that advertising.

But we are spending the money because people are interested.

The venues and shirt brand is the best performing brand.

The poplin basic shirt you have seen in our advertising and range of colors has been complimented by a neck wear program selling equally as well.

Last month there was a survey done and they became the largest selling neck wear brand in the United States, last year.

And Geoffrey Beene neck wear was number two.

All that said and done, we are very pleased.

The new is a stain-free adaptation to dress shirts this.

It has begun in pants, we are taking products and making them stain-free and we are eager and the stores are eager to get that product out in dress and sports shirts, that's the newest entry if you will.

Great, well you definitely have a great venue and model.

Thank you.

Thank you Jennifer.

Just as a reminder if you have a question press star, one at this time.

There are no questions I would turn the conference back to Mr. Klatsky.

Thank you for joining us, I wish you well for the Thanksgiving holidays.

We will speak to you on the next conference call.

Thank you and goodbye.

Ladies and gentlemen this concludes our conference for today, thank you for participating and have a nice day.

All parties may now disconnect.