PVH Corp (PVH) 2002 Q4 法說會逐字稿

Good morning, and welcome, ladies and gentlemen, to the Phillips-Van Heusen fourth quarter and year-end 2002 conference call.

At this time, I'd like to inform you that this conference is being recorded and that all participants are in a listen-only mode.

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

This webcast and conference call is being recorded on behalf of Phillips-Van Heusen and consists of copyrighted material it may not be recorded, reproduces, retransmitted, rebroadcast, downloaded or otherwise used without Phillips-Van Heusen's express written permission.

Your participation in the conference call constitutes your consent to having any comments or statements you make appear on any transcript or broadcast of this call.

The information made available on this webcast and conference call contains certain forward-looking statements which reflect Phillips-Van Heusen's current views of future events and financial performance.

Any such forward-looking statements are subject to risks and uncertainties.

The company's 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 statement, including, without limitation, any estimate regarding revenues or earnings, whether as a result of the receipt of new information, future events or otherwise.

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

Please go ahead, sir.

Thank you very much, good morning, everybody.

It's a pleasure to be here.

I'm joined this morning, of course, with our President, Mark Weber, our Chief Financial Officer, Manny Chirico and Pam Hootkin, our Treasurer and point person for Investor Relations.

We are all very pleased with our performance in what was an extraordinarily difficult environment.

We are not unique.

The consumer spending or lack of spending out there is affecting us as much as it affected everyone and we are thrilled with the way our divisions were able to perform in this environment.

Our dress shirt operations and dress shirt group maintained and grew its leadership position.

We're particularly pleased with the launch of our CK, Calvin Klein dress shirt range in the fourth quarter of last year.

The success of that launch, the enthusiasm that greeted that reinforced our comfort and strong belief in all the research we did on the Calvin Klein brand.

Our sportswear group continued its growth and continued its position as a leader in the classification departments of American department stores.

Footwear, as you read, continued its improvement.

We look forward to Bass to start growing its market share, driven by product and, some of you have noticed and commented on, some of the terrific advertising that we've begun with Bass.

I guess at the bottom line is our ability deliver and perform is a tribute to our strategy, which we've come to call multiproduct, multibrand, multichannel distribution.

It works.

It provides us great stability.

When messed with the infrastructure and the terrific management team, what it results in is what you saw last year and what I'm particularly proud of and that is the fact that our operations generated cash such that we ended with $117 million on our balance sheet and that is particularly pleasing for us.

Regarding Calvin Klein, Mark Weber is leading the integration of that operation for us and leading the movement and new initiatives that we are embarking upon.

Mark will, of course, answer any questions that you folks have on how that's going.

We are particularly pleased with the agreement and principal we reached with Vestimenta, the high-end italian manufacturing company located in Trento, Italy.

We think that augers very, very well for our brand to have a company that is accomplished, professional in managing high-end collection businesses, it means for us we can have a profitable partner that will continue to position Calvin Klein as the high-end lifestyle private brand that he is.

All of these things we feel very good about.

It would be wrong if I weren't to comment on the fact that we are quite concerned about the economy next year.

We are cautiously optimistic that we will be able to achieve that which we have discussed with everybody and released to everybody.

But the environment is simply not good.

I will turn it over now to Manny for comments.

As Bruce said, we are quite pleased with our fourth quarter operating results which were at the high end of our previously-announced earnings guidance.

The fourth quarter improvement in earnings resulted from operating increases in both the apparel and footwear segments.

The apparel segment achieved an earnings increase of $2.2 million or 12%, fueled by higher gross margins.

The footwear segment experienced an increase in fourth quarter earnings of $500,000 or a 20% improvement.

The tight management of inventory enabled gross margins to hold steady with the prior year as promotional selling was minimized.

Overall, net income in the fourth quarter increased 44% to $5.7 million or 20 cents per share, from 4 million or 14 cents per share last year.

Our balance sheet shows an improvement in our net debt position from the prior year of over $73 million as we generated significant cash flow.

We continue to effectively manage our net assets, especially inventory and accounts receivable.

This cash flow improvement had a meaningful impact on our annual interest expense.

Looking out to next year, as anticipated, our 2003 projected operating results will be affected significantly by the Calvin Klein acquisition.

The earnings contribution of the Calvin Klein business in 2003 will be offset by the incremental interest expense associated with the acquisition and expenses associated with integrating various logistical and back-office functions, along with the costs associated with restructuring certain Calvin Klein operations into the PVH organization.

These restructuring charges will include the course to operate the Calvin Klein's men and women's collection businesses through the third quarter of 2003, as well as, the cost to transfer these operations to Vestimenta under a long-term licensing agreement which commences with the spring 2004 selling season.

Overall, as expected, the acquisition will be somewhat dilutive in 2003.

While [INAUDIBLE] income is expected to increase, earnings per share will be affected by dividends on the preferred stock issued to finance the acquisition, which will reduce net income available to common shareholders.

For the year, we estimate that earnings per share will be in the range of 95 cents to $1.00, which excludes the previously-discussed transition expense associated with restructuring and integrating the Calvin Klein operations.

Including these restructuring costs, we estimate the GAAP earnings per share will be in the range of 45 cents to 55 cents per share.

As shown in the earnings guidance table in our press release, the Calvin Klein operations and our new capital structure will completely change our quarterly flow of earnings.

For the first quarter, we are currently projecting earnings per share before transitional core in the range of 10 cents to 11 cents per share.

This compares with an actual loss of 3 cents per share in last year's first quarter.

We'll open up the conference now to questions anyone might have.

Thank you, sir.

The question and answer session will begin at this time.

If you are using a speaker phone, please pick up the handset before pressing any numbers.

Should you have a question, please press star 1 on your push-button telephone.

If you wish to withdraw your question, please press star 2.

Your question will be taken in the order that it is received.

Please stand by for your first question.

Our first question comes from Lee Backus of Buckingham Research.

Please state your question.

Hi, good morning.

Good quarter in a tough environment, guys.

Thanks, Lee.

Just -- does the QNS of 10 to 11 cents, does that reflect your caution that you've -- that you expressed, Bruce?

And what would the quarter look like without the acquisition?

Lee, it's Manny.

Yes, it -- first, it does include some caution, we're planning first quarter comps in the mid-single digit range -- negative single digit range, minus 4 to minus 5%.

Now, trying to compare our old base business with our new capital structure would be very difficult.

And to -- the flow of the Calvin Klein earnings, but I would imagine given the fact that we lost 3 cents last year that we would only be planning the first quarter for a couple of pennies improvement given that, and most of that benefit would be coming from gross margin improvements that we've seen in our sourcing benefits in our factory reconfiguration benefits that we will get a full benefit for this year.

So, top-line growth would be flat to down slightly and we'd have some marginal improvement operational earnings.

Are there any additional expenses in -- in the 95 to $1 of, you know, expenses, operating expenses for the -- for the acquisition and the transition that you can't take into nonrecurring, but will not exist next year?

Yeah.

Yeah, Lee, they're somewhere between 5 cents to 10 cents, a lot of it has to do with start-up costs with some of the new businesses that we're starting up and some transitional costs that you just can't put into those buckets.

But for the vast majority of it, start-up costs associated with our starting up the mens and womens sportswear business.

Okay.

Thank you.

Your next question comes from Bob Drbul with Lehman Brothers.

Please state your question.

Good morning.

Good morning, Bob.

A couple of questions, on the Ventimenta, can you give us a timeframe in terms of how you see that rolling out, you moved quickly to put that in place.

I wanted to see how we should expect that to play out over the next, you know, year and a half?

Well, this is Mark, hi, Bob.

Immediately, Vestimenta and ourselves are looking at the operations, investments is meeting with all the people that currently exist both here and Milan and we're trying to integrate the two organizations.

Over the course of this year, they're going to take on the production of responsibility, namely the pattern-making and all the operational back office sourcing issues that it takes to manufacture a designer collection around the world.

Starting with spring 2004, they will take over the actual marketing, running and profit of the company.

And spring 2004, in this business, starts probably December -- seems to start December 1.

So, fourth quarter, the business will completely transfer over to that.

Okay.

And then a question for you, Bruce, in terms of, you know, since you've closed any major surprises?

Everything going as planned, you know, from the acquisition?

No major surprises.

Everything is going as planned.

The interesting learning, I think for all of us, has been, as opposed to some of the other acquisitions we made, the strength of this brand is so significant, is just beyond anything we ever thought.

And anytime there is even a minor hiccup in conversations with licensees or anybody, it's more than offset by the fact that everybody acknowledges the potential of this brand is so extraordinary, we get right through it.

So, so far so good.

Okay, great, thank you.

Your next question comes from Carolyn Jones of Goldman Sachs.

Please state your question.

Hi, I'm dialing in for Margaret Mager.

I had a couple of questions.

First of all, you changed your earnings outlook for 2003.

I'm curious what -- where that change came from?

Whether it's more because of the difficult environment or more as you looked at the acquisition a bit closer, the costs are going to be a bit more?

No, Margaret, it has nothing to do with the Calvin Klein acquisition at all -- Carolyn, I'm sorry, it has nothing to to do with the Calvin Klein acquisition.

It's a cautious approach to our base business.

We're not willing to, just at this point in time, to look at the bottom line growth in our base business of more than 5 to 8% on, you know, sales that are basically we're planning flat and hopefully we're being conservative, but right now, the environment we're dealing with would -- we think it's appropriate to be more cautious in the -- in that business than trying to plan for top line growth at this point.

Okay.

And then on the fourth quarter, what were your comps in the fourth quarter?

And where did the EBIT margin improvement come from?

What sort of areas, if you have some specifics on that?

Well, the EBIT margin, the improvement was all in gross margin, significant improvement in gross margins associated with our wholesale businesses in particular, both our sportswear and dress shirt business on the apparel side and our Bass business, we've seen significant improvement on the wholesale initial margins and then sell-through margins, as far as, allowance money department stores came in significantly better than we had planned and that was the improvement on the bottom line.

Sales came in right in the middle of the range where we expected.

So, it was all done from an operating point of view.

Secondarily, the comps ran overall about minus 4.5% in the fourth quarter.

Okay.

Thanks.

Your next question comes from Jennifer Black of Wells Fargo Securities.

Please state your question.

Hey, congratulations to all of you.

Thanks, Jennifer.

I have a few questions.

I wanted to know if you could first talk a little bit more about Bass and some of the things that you're doing there both on the mens and womens side, and are you keeping SKUs about the same?

And can you just give us a little more color?

Sure.

Hi, Jennifer, it's Mark.

Hi, Mark.

The Bass men's shoe business has done better than I think a number of the people have faired.

We feel pretty good about what's been happening in Bass.

Our reorders on particularly core items like the [INAUDIBLE] and some of our dress casual shoes continue to perform very well and in particular with May company.

So, we feel very, very good about what's happening in men's.

The women's business has been somewhat sporadic and it's more complicated for us right now trying to spot the exact trends that women are looking to purchase.

However, going into spring, we're positioned very well in women's sandals and we feel confident that we have the right shoes to do business for this year.

Having said that, the shoe business isn't great overall, so, we're cautiously optimistic, but at the same time feel good about our assortments.

We also point out that the introduction of the Izod footwear line to Bass has gotten some very good reactions from a number of retailers around the country.

And as we speak, over the next two to three months, some test orders will be placed and we're hopeful that results will be fine.

Okay.

And as far as the assortments go, have you kept them about the same or narrowed them or broadened them?

Assortments and SKUs are approximately the same except for the introduction of the Izod line in men's and women's.

Okay.

And then can you talk a little bit about the Arrow brand and Arrow sportswear and how your relationship with Kohl's is going?

Well, I hesitate to talk about any relationship with any particular retailer, but I will tell you that we are -- we believe that Kohl's has recognized us to for -- as Bruce said earlier, the quality management team that we are.

We have an excellent dress shirt business that's performing extremely well at Kohl's with some very important increases that I think they would attest to.

In the case of sportswear, we outperformed our plan for fourth quarter, and as you know, we just concluded an industry trade show called the Magic Show, which took place earlier this month, where we met with Kohl's in particular and showed them the management, we had shown the buying staff an introduction of Arrow jeans and some new product categories they hadn't seen here before and we're very, very pleased and we walked away from that meeting feeling that there's growth opportunity in Arrow.

Having said that, the Arrow brand has performed very well in that channel of distribution.

So, our temperature right now is very hot on the brand.

And, yeah, yours -- it definitely looked great when I saw it at Magic, but do you think that that business can be the size of Izod?

Well, difficult to answer.

I would say to you that Izod has a much broader distribution and the success that we're seeing in Izod is -- I have to choose my words carefully, but just short of extraordinary.

Every new product we've launched has performed well.

We've been able to assign a number of very important licenses to the Izod brand whereas in the case of the Arrow brand, we're relying on Peabodies to set up licenses and such.

I think you could take away from us that we will continue to grow the dress shirt business at the rate that the three major stores we do business with grow their shirt business and that's namely Sears, Mervyns and Kohl's.

And the case of sportswear, we're trying to determine how high is high, but as I said, we're feeling very good about the sell-throughs in particular.

And with the way we're looking at the business, we hope to start doing some advertising this year in Arrow, as well, which we think will help fuel the start-up.

Okay.

And then my last question has to do with, how far away do you think you are from signing something on the women's side for the Calvin Klein brand?

I would think we would probably be in a position to announce something in the next 30 to 60 days.

I don't want to be held to that because speed is not as important to us as quality.

One of the things that Mark and I are most thrilled about in the collection business was the high quality of the partner we have in investments.

We want to be able to say the same thing in women's.

We have, I believe, four people who are aggressively discussing with us this issue and we're discussing where the partnership looks the best and what assets people are prepared to deploy to do this.

So, I would like to be able to do it in 30 to 60 days, I think we will probably be able to do it in 30 to 60 days, but if we won't do it unless we have it set up just so.

Because when we go out to the consumer, hopefully in the second of half of 2004, we want to make a major, major Calvin Klein statement.

A major statement with powerful partners as well as our own menswear launch.

In point of fact, Mark and I just made the decision not to rush to market in the first half of 2004 with the men's collection, which we could do.

We have the capability to do it, but we decided we'd rather make sure we have all our ducks in a row, as much product out there as possible so there's a major statement in American retailing for Calvin Klein.

We think it's going to be a major shot in the arm for -- for retailing -- department store retailing in the United States and a major shot in the arm around the world.

Well, I totally agree with you and again, congratulations.

Thank you very much.

Thanks, Jennifer.

Your next question comes once again from Lee Backus, please state your question.

Yeah, Manny, you had discussed refinancing the senior note in April sometime.

I believe that was your original plan.

Where do we stand on that?

I guess right now, Lee, we're -- we are -- the senior -- just to take a step back, the apex note is a two-year note with an interest rate of 10% for this year and that rate would grow in the second year to 15%.

Our plan is to -- we need to finish all our year-end audit as well as the Calvin Klein year-end audit.

To our plan is sometime in the first half of this year to try to go out and refinance those notes in the debt market and we'll do that as the market conditions make themselves available and given the world conditions as they are right now.

So, you expect that to be completed sometime in the first half of this year?

Assuming the market conditions.

Assuming the market conditions are, that's correct, Lee.

Okay.

Thank you.

Your next question comes from Margaret Mager of Goldman Sachs.

Please state your question.

Hi, it's Margaret Mager, how are you?

Hi, Margaret, how are you?

Good.

Caroline and I are different places, so, we can't talk to each other, so, thank you for working with both of us.

I have a couple of questions.

Let's see, first of all, on the gross margin, I haven't seen a 42% gross margin for you -- from you guys in I can't remember how long, if ever, and when I look at the sales volume, it was the lowest dollar volume quarter of the year and yet you're highest gross margin quarter.

Can you talk about what might have happened in the fourth quarter that was different than the other quarters and how you could experience, you know, this occurring?

Yeah, I guess, Margaret it was twofold.

Our retail margins, the the very tight inventories we had, there was almost no clearance of post-Christmas for us to really sell.

So, we didn't have -- we didn't experience the markdowns we'd usually experience in our retail stores in the weeks immediately following Christmas, which is a very, very big weeks for us and the outland environment.

And in January, we didn't have any significant markdowns as well as any year-end inventory reserves that would be required or markdowns that would be required on the year-end inventory.

So, the retail component was very, very clean.

On the wholesale side of the equation, our margins were also very strong, both from an initial point of view and the need for markdown allowance money for department stores.

There was just -- you know, it wasn't anywhere near our budgeted amounts.

So, that came in much better.

And the need to sell goods either right before Christmas or after Christmas, to sell goods into the secondary channel, with excess merchandise, was almost nonexistent into March on TJ.

Lastly, as you recall, we have the factoring reconfiguration in dress shirts last year and those benefits came through this year.

But given all of that as background, our margins have been running consistently from the second quarter through the fourth quarter somewhere in the neighborhood of at least 200 basis points higher than they were this time last year and the fourth quarter historically is our highest gross margin quarter.

Uh-huh.

So, it's an outstanding performance, our margins were up in the neighborhood of 300 basis points for the quarter and that was almost 100 basis points better than we planned and it's for the reasons I talked about.

So, it's all related to less markdowns and not anything mix shift?

No mix shift?

No, it's not related to anything significant.

Our mix hasn't changed substantially to affect the mix in the business and second, it's markdown improvement and it's also sourcing improvements that should continue into next year, as well.

Uh-huh.

So, do you see the benefits from sourcing as big in '03 as what you experienced in '02?

No, not as a growth.

We're looking at gross profit before licensing revenues next year, we're looking at our gross profit to improve somewhere in the 50 to 70 basis points range overall.

And then we get the substantial benefits because of the licensing, but that's not the right way to look at it.

Right.

Right.

Just taking this year, the full year, the 37.8% gross margin versus 35.8% last year, the 200 basis points of improvement, can you give us an attribution analysis, like what was from sourcing versus less markdowns?

I'd say slightly, you know, again, slightly more than half, maybe about 60% relates to sourcing and about 80% relates to tighter inventory, I'm sorry 60% -- that doesn't add! 60 and 40!

I don't want to make everybody nervous. 40% relates to tighter inventory, less excess goods, less markdowns.

Uh-huh.

And we're planning the business this year exactly the same way to be tight on inventories, if we happen to miss some sales and it happens, so be it, we'll outperform the gross margin line.

It doesn't seem like this environment is the one to be aggressive on.

What were inventories at the end of the quarter?

Inventories, year-over-year, were flat but that's after after about a 20% decrease last year year-over-year.

So, we're running about, I guess inventories are down about $4 million.

Uh-huh.

So, just to summarize, you expect the same amount of sourcing benefits in '03 that you saw in '02?

Yes.

Okay.

Another question.

The royalties for the Calvin Klein license, the underwear and the jeans, can you tell us what kind of royalty rate you get from your licensees on those?

Margaret, we can't -- it's comparable to all our other licensing deals.

There is no difference on those rates --

Which is --

No, no.

We don't -- we can't disclose the rate.

A range -- can you give a range or some kind of sense of it?

No, Margaret.

I don't think we can.

Bruce, do you think that you'll go for, you know, a higher rate on your new women's line?

I guess I'm asking this vis-a-vis, you know, the Ralph Jones, situation, where they want substantially more than what they initially set the license up for, I'm wondering if there's any escalation in the marketplace for license fees in general for, you know, these top brands like Calvin Klein or Ralph Lauren.

Clearly, just to clarify, clearly the Calvin Klein brand is deserving of the highest rates that exist in this industry for this type of transaction, the brand strength, the value it brings to the product is so significant, it's to the the top of the heap.

I can't comment on what's going on between Jones and Ralph.

It's our view that the rates that are in the market now are fair and appropriate.

We -- if one decides to license a business to a partner that has greater expertise in a particular product area, we're very cognizant of the fact that partner has to feel good about the business, has to be able to make a good return on what they're doing and importantly contribute significant money to the marketing of the brand for the brand halo around the world.

So, you put all of that together and what I'm saying to you is, you know, there's an old expression that you guys know better than I do, Bulls make money on Wall Street, bears make money on Wall Street and pigs get slaughtered.

[ Laughter ]

We have no desire to be pigs.

So, I think Calvin Klein has structured very fair deals and our deals going forward will be consistent with that.

The four folks we're talking about, about women's wear, are we good negotiators?

We'd like to think so, but the issue here is not a difference in economics.

The issue here is the expertise and the assets they're prepared to employ to build a brand long-term around the world.

Great.

Okay.

And just another question about the -- just the positioning of the Calvin Kleins men's brand which you'll be doing yourselves in the better zone.

With all the price compression that's gone on in the menswear area, I know it's benefited your Izod and Van Heusen brands in the in the main floor.

I'm just wondering how you feel about price positioning as you get ready to roll with a major new initiative?

This is Mark.

Margaret, we're going to price this line with -- at the economics that we think make sense for Calvin Klein.

Those price points will be similar to Polo and anybody else, the few others that can trade at those areas.

Calvin Klein is a premium designer that will demand a premium price.

However, the marketplace will dictate, ultimately, whether the retails these items, anybody else's items go out.

The price compression is not at the initial price.

The price compression is whether or not stores are getting traffic.

We will police this business very closely and we will be sure that we and our partners make money, but price at the high end of better, that's our strategy and we will demand it.

That's very helpful, thanks and good luck to everybody.

Thank you, Margaret.

Thanks, Margaret.

Your next question comes from Baron capital.

Please state your question.

Hi, everyone.

Just two quick questions.

Can you talk about what's going on with fragrance and maybe if we have any new launches or if there are opportunities there?

And secondly, if in licensing, are there licensees out there that you feel like maybe you can work with and try to improve so you can increase license fees this year?

And maybe are there other opportunities in licensing you'd like to discuss?

From a licensing point of view, we've had a series of meetings with the president of Unilever.

We're scheduled to meet today -- this week, with the rest of the management team of Unilever.

Unilever decided to stay in this business and clearly Calvin Klein is their franchise and the bellwether for the rest of the businesses they're in, which are relatively small by comparison.

The Calvin Klein fragrance business is a unique business in that it's extremely strong here and perhaps even stronger around the world.

It's done successfully in two genders, in a myriad of products.

As some of you may or may not know, colognes and fragrances have a shelf life.

Calvin Klein has demonstrated over the years that its shelf life is sustaining that, it actually, this past year its grown on its more mature brands.

So, we're very confident in what is going on in that business.

The launch of the Crave collection has been particularly successful in Europe, somewhat less successful in the U.S.

Having said this, a launch of a fragrance is a propriety -- propriety issue.

People don't like to give too much information until they're ready to go and therefore we're holding some of the new initiatives close to the vest and as the year goes on, we'll release information.

This new, exciting packaging agenda is going on and we feel very good about that.

Great.

In terms of our other licensees, one of the great things about what Calvin and Barry has done, is in most cases they've picked some very, very good partners and these partners need a strong management team to talk to about business opportunities.

Bruce and myself are currently meeting with all the licensees over the course of the next 30 to 60 days to make sure that we understand their business, that we understand where the growth opportunities are.

I will say, however, that the opportunities for categories that did not exist in the Calvin Klein franchise, like men's and women's sportswear and shoes and accessories in the CK area, are where the excitement is coming from right now.

Calvin Klein, as you know, as Bruce has mentioned over the course of the last 30 days, is one of the world's great brands, but is relatively small in terms of the opportunity that exists and we're particularly excited about categories that will become available and we will be launching in the next year to come.

So, you expect this business to grow over the next couple of years, the licensing, in particular?

Absolutely.

Okay.

Thanks very much.

Ladies and gentlemen, if there are any further questions, please press star 1 at this time.

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

Thank you all for joining with us today.

We're proud of what we accomplished last year and we know, as we say around here, the sign of a champion is the ability to repeat.

So, we look forward to sharing with you our progress as we continue to manage and run our core businesses and excitingly launch initiatives to grow the Calvin Klein franchise.

Thank you all.

We will speak to you next quarter.

Ladies and gentlemen, this concludes our conference for today.

Thank you all for participating and have a nice day.

All parties may now disconnect.