PVH Corp (PVH) 2003 Q1 法說會逐字稿

Good morning and welcome, ladies and gentlemen, to the Phillips-Van Heusen Corporation first quarter 2003 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.

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The information made available on this webcast and conference call contains certain forward-looking statements which reflect PVH's view of future events and financial performance as of May 22, 2003.

Any such forward-looking statements are subject to risks and uncertainties, indicated from time to time in our SEC filings.

Therefore, the company's future results of operations could differ materially from historical results or current expectations as more fully discussed in our SEC filings.

The company does not undertake any obligation to upstate publicly any forward-looking statement, including, without limitation, any estimate regarding revenues or earnings.

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

Please go ahead, sir.

Thank you and good morning, everybody and thank you for joining us.

We're in our New York office and I'm joined as usual by our President, Mark Weber, Manny Chirico, our Chief Financial Officer, and Pam Hootkin, our Treasurer and Point Person for Investor Relations.

Let me begin by saying that we are quite pleased with our first quarter results, essentially it was right on our expectations.

We feel good about the way we have performed.

Most particularly let me comment first on our base businesses, our Powell operating margins were exceedingly strong, realizing the benefits from both the sourcing reconfiguration that we've discussed with you over the past couple of years.

We are in the final stages of realizing all of that and the products that are going out the door are experiencing good margins.

We think in a very difficult apparel environment that we are outperforming the competition and feel quite good about our apparel products.

Footwear is a little slower than apparel.

That's largely due, as those of you who know the Bass product, knows that in the spring's last summer season it's driven largely by sandals and canvas footwear and on the East Coast, we certainly have not experienced spring yet.

So the sales of that product has been sluggish and depressed our margins somewhat as we've attempted to move inventory in that area.

The only other comment I would make on our base businesses largely pertain to dress shirts in our apparel segment.

While our product has performed well, the replenishment of our basic goods has been a little bit slow given the sluggish retails compared to what our plan has been.

That's resulted in a minor inventory blip that Manny will chat with you about.

That really is of no concern to us because it's all in basic goods and will be balanced in a few months as we move forward in terms of adjusting our production requirements for basics as part of our normal operating procedure.

On the Calvin acquisition front, everything seems to be going as planned, basically smoothly.

The important objectives for this year are on target.

Most interesting I would guess to you is the expense rationalization, which is right on plan and we feel quite good about that.

We also feel good about the strength of the Calvin brand as is exemplified by the royalty revenues that in spite of a very difficult global environment in terms of consumer spending is right on plan.

So, we feel good about that.

We are on target for the launch of the better sportswear businesses, both men's and women's for the second half of '04.

We will be announcing a women's partner, most probably not by the end of May given documentation that -- legal documentation -- that needs to be done.

But certainly I would expect us to do that during the month of June.

So, we feel good about that.

And lastly, I need to congratulate my financial partners, Manny Chirico and Pam Hootkin on their ability to assist us in executing a terrific deal in the high yield market.

As many of you know, we concluded a transaction at slightly over 8.1% for $150 million of 10-year bonds.

The proceeds of which are primarily being used to -- and have already been used to take out the bridge loan we received from Apax in connection with the purchase of Calvin Klein.

So, things are on track.

Things are on plan.

Our anticipation is for continued weakness in the first half of the year.

As we've experienced to date, we really see no reason the consumer should start spending aggressively for the whole year.

The only optimism I have is as we enter the second half, the comparisons get much easier.

So, therefore, Manny will be reaffirming our estimates for the year.

I'll turn the call over to Manny now.

Thanks, Bruce.

As Bruce said, we are quite pleased with our first quarter results.

Earnings per share, excluding the Calvin Klein integration course, came in at the top end of our previously announced guidance.

Total revenues in the quarter were $377 million, an increase of about 8% over the prior year.

The increase was due to the royalty revenues generated by the newly-acquired Calvin Klein licensing business and was partially offset by a 2% decline in revenues in our base apparel and footwear segment.

Even in the first quarter, before the Calvin Klein integration course improved to $20.4 million from last year's $4.4 million.

The improvement was due to the additional revenue earnings associated with the Calvin Klein licensing segment of a little over $12 million.

In addition, the operating income of the apparel and footwear segment increased by $4.3 million.

This was driven by higher gross margins and our wholesale apparel businesses.

This increase was partially offset by reduced earnings in our Bass footwear business resulting from weak sales of sandals and spring canvas product, due to the unseasonably cold weather in the first quarter.

First quarter earnings were also impacted by the costs associated with financing the Calvin Klein acquisition.

Interest expense increased by approximately $2.8 million and dividends on our newly-issued convertible preferred common stock were $4.5 million.

Overall, earnings per share in the first quarter, excluding the Calvin Klein integration course, improved to 11 cents per share, compared to last year's loss of 3 cents per share.

From a balance sheet perspective, inventories at the end of this year's first quarter, excluding the impact of the new Calvin Klein businesses, were up about 10%.

This follows a 20% comparable decline in inventories at the end of last year's first quarter.

The current year increase principally relates to basic reorderable dress shirt inventories.

The increase does not present an inventory exposure as we are rebalancing our future basic dress shirt production and expect our inventory levels to come back in line with the prior year levels in the third quarter of this year.

Looking out to the balance of this year, our 2003 projected operating results will continue to be significantly affected by the Calvin Klein acquisition.

The significant earnings contribution of the Calvin Klein business in 2003 will be offset by the incremental financing costs associated with the acquisition, as well as costs associated with integrating various Calvin Klein back office functions into PVH.

These integration costs also include the losses associated with operating the Calvin Klein mens and womens collections businesses.

These losses will continue through the third quarter.

Looking out for the year, we continue to estimate earnings per share to be in a range of .95 to $1.00 a share which excludes the previously discussed integration costs.

Including the integration costs, we estimate GAAP earnings per share to be in the range of 30 to 40 cents per share.

As shown in our 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 second quarter, we continue to project earnings before integration costs in the range of 20 to 22 cents per share.

This compares with actual earnings of 28 cents per share in last year's second quarter.

With that, Bruce and I will open it up -- Bruce, I and Mark will open it up for any questions that you might have.

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

If you're 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, press star 2.

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

Please stand by for your first question.

Our first question comes from Carolyn Jones from Goldman Sachs.

Please state your question.

Hi, how are you.

Fine, Caroline, thank you.

I had a question about the inventory.

How -- you said you have a little bit of extra inventory, but you also talked about better full-price selling in your press release.

I wondered if you could reconcile those two comments and also comment on how inventory looks in the retail channel, actually at retail.

And where you're seeing more inventory and also the difference between apparel and footwear.

Thanks.

One, yes, in terms of more regular price selling in the price release, I'm trying to find that, but the change that's going on in the business over the past couple of years, as you well know, is the application of EDI, that is to say we ship merchandise to the retailer as they sell through the inventory.

That's done a lot to -- in many areas, particularly with large companies such as ourselves and retail partners, minimize the need to promote goods at retail because the inventories don't build because they're not there.

So, the product that we've been shipping, I think compared to others in the channels that we compete in have been selling at higher retail price.

That, combined with our lower cost of goods have given us higher margins.

That -- we have not shipped as much replenishment goods as we had originally thought we would and planned for, therefore, the slightly higher dress shirt inventory component in our inventory increase that you see at the end of the quarter.

So, that goods is in our stock as opposed to in the retail stock, which is effectively a good thing in basics, again, because you don't have to promote the goods at the point of sale as much.

And as I said, that's not a significant concern to us because we will be balancing that over the course of the next couple of months as we cut additional merchandise for going forward.

So, that hopefully reconciles that apparel question for you.

On the footwear side of the house, we think largely that our revenues are down about 2% and that's largely driven by, as I said, the sandals and canvas lack of demand of reordered goods there, as well, which has been the most significant -- the softest demand in our company by far.

And our inventories at footwear overall, to answer the last part of your question, are down about 2% from this point last year.

Okay.

So, in line with your sales.

Yes.

We're okay.

Could you also comment on your outlook and what sort of sales trends you're seeing there, through the quarter, what's the trend and also since the quarter has ended?

Fundamentally, we're down mid single digits in the outlets.

There doesn't seem to be an appreciable pickup in that area, you know, it's very -- the consumer's very funky.

They -- we had a great Easter weekend, then we fall off, then we're anxious to see what we do for Memorial Day weekend.

Our retail management markup points out to me as I'm talking has done a wonderful job.

Our margins are up because our inventories are substantially in control there and I think I will stick by what I said, I don't think we're going to do much better in the first half of the year and the reason we might do somewhat better in the second half is because the comparisons get easier.

Have you seen any change where you have seen the weather get a little warmer?

Yes, that's what I was going to say, Caroline.

It starts and it stops.

Sometimes it's attributable to the weather, sometimes it's attributable to the holiday weekend.

It starts and it stops.

When we get a beautiful day, we pick up.

But I don't like to be a weatherman.

Okay, thank you.

Thank you.

Our next question comes from Bob Drbul from Lehman Brothers.

Please state your question.

Good morning.

Good morning, Bob.

Bruce, start off with a question for you.

I guess as the integration of the Calvin business continues, I guess if you had the point to sort of your key accomplishments so far, you know, and look at what, you know, you think your major challenge is for the rest of this year to make your business plan, can you talk to those points for us?

As we've said, key challenge and key management execution this year has to do with expense rationalization.

Changing from a private company environment to a public company environment.

That's clearly in line.

There's more work that needs to be done.

Manny is quarterbacking that for us and it seems to be moving forward quite well and I'm optimistic that we won't have any surprises there.

That's year 1 plan.

Mark and I are working on the better sportswear businesses.

Mark is supervising the Kent Wayne and his group, our Vice Chairman for sportswear, launching the better sportswear business, getting ready to do that, that's in full swing as we speak.

And we are, as a team, concluding the negotiation for the women's sportswear deal and that needs to be accomplished and penned, as I said, if not by the end of this month, certainly during the month of June.

I see no reason why that won't happen.

Immediately following those things, I would think principally Mark and I will be working on a comprehensive review of the existing marketing plans and the licensing arrangements that Calvin has out there.

They're doing quite well.

But we think we can work with them in such a way to grow the brand even more aggressively, particularly outside of the United States.

We wanted to get rid of the housekeeping stuff, that's the expense rationalization and the better sportswear businesses launched.

Then we start moving globally with the key Calvin Klein licenses.

Okay.

I guess the other part Manny whispers in my ear is we are in the process of executing the collection transition to Vestimenta, as I've said before, they're beginning to produce our fall merchandise, which is terrific and will take over the full business in the first half of next year.

Again, we see no problems there.

Both Mark and I will be meeting with our Vestimenta next week here in New York.

Together with the Calvin Klein team, of course.

Okay.

And the follow-up would be, you know, around the department store business and, you know, the business that you guys do within the department stores, what is your assumption or expectation for the level of promotional activity that, you know, we are seeing right now and, you know, could see over the next few months, you know, leading into back-to-school?

Listen, department stores need to get people in the stores.

Whether or not promoting is the right vehicle, I leave that for you to ask to them, but we anticipated a difficult year.

We anticipated difficult year every year.

And our businesses are set up to deal with promotions should they become more frequent than they are or on a more regular basis.

We don't like it long-term in terms of what it does for our brand and I don't necessarily agree that it's the right thing for department stores.

I think they have other things to sell other than price.

Having said that, we're positioned well, we know how to do business when business is tough and all of our budgets provide for an adequate -- a more than adequate promotional agenda.

All right, thank you.

Thank you, Bob.

Thank you.

Our next question comes from Carla Catella from JP Morgan.

Hi, I have one housekeeping item.

The Cap Ex for the quarter?

Just over $3 million.

Okay.

That seems a little bit low, I'm wondering if you've changed -- or if you have a guidance for Cap Ex for the year?

Yes, the guidance that was given the Cap Ex for the year is about $33 or $35 million and it's just a function of timing, most of our capital additions are planned for third and fourth quarter and it's pretty standard the way this kind of flows through.

Okay.

Then I had the restructuring charges or the noncash -- or the integration charges, how much of that is cash versus noncash?

About 90% of it is cash.

Okay.

And the numbers are overall transition and restructuring one-time costs are consistent from our estimates that we've given from the beginning but we are anticipating that more of those restructuring costs will flow through the income statement as opposed to flowing through the balance sheet.

So, we continue to estimate that the one-time cash outflow would be approximately $40 million.

As we've analyzed the business further, more of that will flow through the income statement as opposed to flowing through the balance sheet as a purchase price adjustment.

So, nothing's really changed on our estimates from a cash point of view.

Okay.

I think before you had like $25 million or so going through the income statement.

You're saying it should be a little bit higher than that?

On an after-tax basis, the number is about $20 million that's flowing through.

Okay.

And the other number is about $15 million.

Okay.

Great.

And just to clarify, I -- the $6 million that was actually a reduction to sales in the adjustments, what does that relate to?

It relates to the collection business of Calvin Klein, the mens and womens collections business which will be transferring to Vestimenta next year.

What we attempted to do was to try and show what the company looks like when the restructuring is completed by the end of the third quarter.

Okay.

And was there a payout for the Calvin Klein earnout in the first quarter?

Or is that done --

It's done quarterly, but there was no payout in the first quarter.

There will be a payout made in the second quarter, third quarter and fourth quarter, the way it rolls out.

Okay.

Great.

And just one last question.

Do you have an estimate of what pro forma EBITDA would have been last year if you had owned Calvin Klein?

No.

Okay.

That's what I assumed.

Thank you.

You're welcome.

Thank you.

Our next question comes from Jennifer Black from Wells Fargo Securities.

Please state your question.

Good morning and congratulations on executing in a tough environment.

Thanks, Jennifer.

You're welcome.

I wondered if you still expect to launch simultaneously the womens with the mens?

And I wondered if you had identified how many doors and maybe it's too early to ask these questions.

And lastly, are you going to go into specialty, as well as department store?

As we speak, we plan on launching mens and womens together.

Uh-huh.

As you know, we originally thought we'd launch mens first and then womens, we decided to launch collectively for fall '04, we're getting tremendous pressure now from both mens and womens to see if we can do it earlier and if they can do it simultaneously, we will.

In terms of doors, that will be up to us to determine which are the "A" doors and which doors we want to go in and the total amount is yet to be said.

It looks like the launch would probably be in 250 doors of the best doors in America.

All shops, both mens and womens, in collection environments and we feel very, very strongly about our ability to execute this.

And would any of them be specialty doors?

I think there will be some specialty stores as we roll forward, Jennifer, but our focus right now is on the top 250 department store doors.

Okay.

And I heard that some retailers are getting out of the mens business.

Do you have any thoughts about that?

Some retailers going out of the mens business.

Who are you referring to, Jennifer?

I heard Target is exiting.

Is that true?

We must have read the same article! [ Laughter ] We -- I read that, too.

They wanted to expand their food business and it's interesting because, I certainly admire Target, I admire the way they run and everything about them.

I will be clear about that.

It was fascinating to me, a lot of people questioned the validity of department stores going forward and department stores, because of the advent of these -- of mass merchants and the growth of mass merchants, both Wal-Mart and Target and perhaps a couple of others.

And I feel very strongly that while department stores may have some problems, their cash flows are very strong, they're the only places to buy brands in America and when you listen to people making decisions about whether they want to devote more linear footage to food or other kinds of -- or hard goods, vis-a-vis apparel, I think that bodes well for the future of department stores as carriers of apparel.

Okay.

And then one other question going back to Calvin Klein.

Do you -- when you launch Calvin Klein, do you intend to launch licensed products with the Calvin Klein line at the same time?

Or is that something that will come later on?

Jennifer, as we speak, there are opportunities that are under negotiation for extensions of the Calvin Klein brand.

Okay.

And -- and therefore you will hear over the course of the next six months to a year about new licenses.

Now, we have plans for accessories, we have plans for shoes, of course, and we have plans for jewelry.

We have plans for a number of other items that we think are parallel with what Calvin has done, including products for the home.

So, the opportunities here, as Bruce said earlier, are extraordinary.

Both in the United States and around the world and just we're reluctant to announce them as we go along.

But, yes, there will be a significant amount of product that heretofore did not exist with the Calvin Klein name.

Also, coincidentally with that, in our meetings with Unilever, they're extremely excited about us being involved now with Calvin Klein and they, too, have stepped up and said when we're ready -- we're meeting with Unilever next week -- they're presenting their business plans to us.

And incorporated in the business plans is a heavy up on new products and advertising associated with these new launches.

Okay, great.

All right, well, it sounds like we have a lot to look forward to.

Thank you.

Thank you.

Our next question comes from Christina Bonnie from Credit Suisse First Boston.

Please state your question.

Yes.

Good morning, everyone.

Good morning.

My question just involves the integration costs.

I was hoping maybe you could give us an update on where you are in terms of the plan, conversion to MIS, et cetera, and maybe breakdown a little bit more of the conversion -- the integration costs and how much of that was Vestimenta and how much of that was really head count?

Sure.

At this point -- just an update on where we stand with the integration, MIS will be completely converted over by the end of June.

We've already converted over their retail systems, their wholesale systems.

We're in the process of moving payroll and some of their corporate systems, but that's gone exceedingly well.

The head count reductions, we've talked to all the people at Calvin Klein, we've given them end dates, we've communicated to them severance packages and what their stay bonuses would be and that's all being communicated.

Approximately a third of the people that we are eliminating are already gone and over the next two to three months, another third will be gone with the final third happening in the third quarter.

The loss associated with Vestimenta is, for the first quarter, is somewhere in the neighborhood of about $8 million.

And that relates to a lot of the costs to close it down and move the inventory and recognizing a lot of the shut down costs associated with the Vestimenta.

Okay, great.

And also, I just didn't hear, did you give the comp store sales for the retail outlet stores?

Say that again, Christina?

The comp store sales for the retail outlets?

Did you give a comp number?

Yes, we did.

We said we were minus mid single digits and it's improved slightly in the beginning,May.

Okay.

Great.

And I think you did confirm that you still feel very comfortable with the $40 million for total restructuring charges for the year, correct?

That's correct.

Between what will flow through the income statement and the balance sheet and in there, as we talked before, is all the severance and everything that goes with it and everyone at Calvin Klein and all the people have already been spoken to, relating to those things, so, that's all behind us, as well.

It's important, Christina, I want to be sure, there is a wide audience on the call.

That it's clear that Manny spoke to you about the progression of the severance and over the course of the next two and into the third quarter, but everyone has already been notified.

There are no more surprises coming in the Calvin Klein organization.

Great, no, that's helpful.

And my final question is with respect to gross margin.

Obviously you've made great improvement and you're selling at higher grosses.

Is there any sense that obviously you've allocated for markdown moneys, but with some pull pack on replenishment orders to what you expected, do you see that markdown money getting higher in the second quarter relative to the first?

No.

I think our budgets have been in place, we project out money.

We don't book keep it the way it is spent by the department stores.

We book keep it based on the ways we see the trends in the business and spread it over the year.

I don't anticipate it being any higher than it was in the first quarter.

To remind everybody, the first quarter, especially the first part of the quarter, March, was just very tough in all avenues of retail with the war and geopolitical situation.

We saw a bounce back somewhat with the change in Easter, so, I think if the weather will cooperate, I think we could see some improvement there.

Great, that's helpful.

Thank you very much.

Thank you.

Our next question comes from Clark Orsky from KDP Capital Management.

Please state your question.

Hi, I just wanted to clarify on the SG&A line for the Calvin Klein integration costs, the $15.3 million.

How much of that is sort of integration?

And how much of it is sort of the ongoing operations of the company?

Or do you consider it all?

None of it is ongoing operations.

We were very, very careful of how we laid it out.

What we've included in -- there are really just two things we've included in the integration costs.

It's the costs associated with closing down and transferring, to transferring the collection business to Vestimenta.

That cost, the costs associated with that factored in.

And then it's the duplicative cost of running a Calvin Klein-backed office, MIS, finance and a PVH back office and those, of course, will continue to shrink and go down over the next two quarters and be completely eliminated by the end of the third quarter.

Okay, so the $15 million is --

When we compare ourselves next year, we would be comparing ourselves to the 11 cents per share, we are not going to be comparing ourselves to the 22 cents per share.

It's just a moment in time and it's the cost of getting the integration of the cost of the acquisition behind us.

So, the full amount would count toward your total one-time restructuring?

Yes, absolutely.

And the preferred stock dividends, I assume those were picked?

Yes, those are picked.

Okay.

And revolver availability at the end of the quarter?

We weren't drawn down at all and our revolver -- and we only -- we are utilizing about $130 million of LCs.

So, we have availability against the $25 million line of -- 195.

Thanks a lot.

You're welcome.

Thank you.

Just a reminder, ladies and gentlemen, if you do have a question, please press star 1 on your push-button telephones at this time.

Thank you, if there are no further questions, I will now turn the conference back to Mr. Bruce Klatsky to conclude.

Thank you all very much for your interest in our company and for our new bond holders, thank you for your participation and we look forward to briefing you again at our conference call in mid-August.

Have a great Memorial Day, everybody.

And shop!

Ladies and gentlemen, if you wish to access the replay for this call, you may do so by dialing 1-800-428-6051 or 973-709-2089 with an ID number of 292129.

This concludes our conference today.

Thank you all for participating and have a nice day.

All parties may now disconnect.