PVH Corp (PVH) 2003 Q2 法說會逐字稿

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

At this time, I would 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 up the conference for questions and answer after the presentation.

This web cast and conference call is being recorded on behalf of PVH and consists of copyrighted material and may not be recorded, reproduced, retransmitted, rebroadcast, downloaded, or otherwise used without PVH's express written permission.

Your participation in the Q&A portion 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 web cast and conference call contain certain forward-looking statements which reflect PVH's view of future events and financial performance as of August 21, 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 update 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 for that very much.

Good morning, and thank you for joining us.

I'm joined today, as usual, by Mark Weber, our President, Manny Chirico, our CFO, and Pam Hootkin, our Treasurer and point person on Investor Relations.

Let me begin with some general comments, then Manny will then quantify some of these and talk in a little bit more depth.

In our view -- we're quite pleased with what we've been able to do in the second quarter and the first half.

Our view is the environment is extraordinarily difficult.

All of the positive sales results that we've seen in retail through the end of July, we believe, were highly price driven.

We think the profits were -- everybody in the channels of distribution and the pipeline suffered as a result of these price promotional-driven sales.

We are hearing some reports that Back-to-School is getting off to an okay start.

We hope these reports are good.

We also hear that there's lots of talk about the economy improving and people starting to spend some more money.

We hope these reports are true, as well.

As it pertains to our business we hope, particularly in our retail sector, that as those sales which are largely driven by tourists and travel-related sales will pick up with the economy, and as the weak tourist environment becomes less important and the sales shift more to permanent population areas, and are more permanent population driven.

But only time will tell, and we're looking carefully at that.

Let me now go into components of our business.

First, the issue that most of you are quite interested in and that pertains to Calvin Klein.

That integration is going exceedingly well and we are moving slightly ahead of plan in that regard in terms of the changes and adjustments that we're making.

Mark will be available to answer a lot of your questions in this regard, but he and all of us are quite pleased by what we have seen so far in the development of our two better sportswear businesses.

We will be previewing Men's product at the Magic Show next week.

Our Women's partner is a joint venture formed by Kellwood, Andrew Grossman, and Alex Vreeland are somewhat further advanced, as they will be delivering product in the spring, in the March area, and their preview of product to our retail partners has been very positively received.

The store -- the in-store shop designs look good, so we are quite pleased with the progress that we are making in that regard and look forward to the impact that the Calvin Klein better sportswear Men's and Women's product will have on retailing in the second half of next year.

We think that better sportswear in both Men's and Women's is an opportunity to take advantage of the weak business and improve upon that business, and we look forward to that.

Our transfer of our collection business to Vestimenta is also moving well.

They are currently producing our fall product, and the early reports that we are getting is that the product is substantially improved in terms of fit and quality, and we feel good about that, and we will be in a better position to talk to you about that at the end of the third quarter.

Moving on, our Dress Shirt business is performing exceedingly well.

It has improved significantly from when we spoke to you last time.

We feel good about the sell throughs and good about the demand for EDI replenishment goods there.

And are cautiously optimistic that that will continue for the balance of this year.

Similarly, our Sportswear business' bookings -- advance bookings look good and strong.

We're pleased with the product there, and we think that we should do quite well for the balance of the year there.

This is attributable to two things.

One, our traditional department store business is quite good, and the department stores have done an excellent job in managing their inventories so that the demand for our goods flowing into the stores are not hampered by any inventory glitches.

That, I guess, is the good side to having a highly promotional environment for the first half of the year, the pipelines have been kept quite clean.

So we feel good about that.

We don't feel as good about our retail businesses.

As I said, these businesses, particularly during the first part of the year and over the summer, are largely driven by tourist traffic and travel, and as you all know, that's been down quite significantly this year.

And as a result, our businesses were down in the low single digits.

We are hopeful, as I said at the onset, that this alleged improving environment as we shift away from travel-related businesses will improve those businesses.

We are planning those businesses to be flattish and up slightly as the year progresses.

We did that largely because the comparisons are quite -- much easier than they were in the past and the second half.

Last year we were down slightly and so we thought we should plan up slightly.

So in sum, the integration is going quite well.

Our wholesale components of our businesses are doing quite well and we are cautiously optimistic there.

And our retail businesses created some problems for us, but we are hopeful that they will improve during the second part of the year slightly to permit us to achieve our earnings estimates.

Our inventories are in good shape.

As we said in our release, we had some increase due to the Calvin Klein acquisition.

We brought some goods earlier to feed an aggressive Sportswear business, and those goods are already being shipped and we increased, somewhat, our Dress Shirt staples so there's no issues there.

With that I'll turn it over to Manny.

Thanks, Bruce.

As Bruce said, we're pleased with our second quarter results.

Total revenues in the quarter were $377 million, an increase of 14% over the prior year.

The increase was due to the royalty revenues generated by the newly acquired Calvin Klein licensing business, as well as increases in our wholesale apparel businesses, particularly Van Heusen, IZOD, and Arrow.

These increases were partially offset by a 2% sales decline in our retail.

EBIT in the second quarter, before the Calvin Klein integration cost and a gain through the sale of our investment in Gant, improved to $27.3 million from $17.8 million last year.

The improvement was due to the addition of $11 million of earnings associated with our Calvin Klein licensing segment.

Offsetting this increase was a 4%, or $1 million, earnings decline in our Apparel and Footwear segment.

The strong sales and profit performance of our wholesale apparel businesses were not sufficient to offset the earnings decline in our retail business, which experienced comp store sales of -2% and higher promotional selling in the quarter.

The second-quarter earnings were also impacted by the financing of the Calvin Klein acquisition, resulting in a $4.2 million increase in our interest expense and a payment in kind of $5.1 million of preferred dividends on our newly issued preferred to common stock.

Overall, earnings per share in the second quarter, excluding Calvin Klein integration costs, were $0.21 per share after preferred dividends, which is in line with our previously announced earnings guidance.

This compares to earnings of 28 cents per share last year, which were not impacted by the preferred dividends before the additional outstanding common shares associated with the CK acquisition.

From our balance sheet perspective, inventory at the end of this year's second quarter, excluding the impact of the new Calvin Klein businesses, were up about 8%, following a 24% decline last year in the second quarter.

The current year's increase principally relates to basic reorderable dress shirts and the planned early intake of four wholesale sportswear goods which we plan to ship in early third quarter, and as such, does not represent a markdown expenditure.

We expect our inventory levels to come back in line with prior year levels in the third quarter of this year.

Looking out for the year, we are cautiously holding our earnings per share estimate of $0.95 to $1.00, which excludes the previously discussed integration costs and Gant gain.

In order to achieve our earnings estimates, we are anticipating an improvement in our retail business in the second half of the year as we transition from a largely summer tourist- and vacation-driven selling period and enter the fall holiday selling period.

As shown in the earnings guidance table in our press release, the Calvin Klein operation and our new capital structure completely changed our quarterly flow of earnings, as a significant earnings contribution of the Calvin Klein business will be offset by the incremental interest expense, preferred dividends, and the additional shares outstanding associated with the acquisition.

For the third quarter we continue to project earnings before integration costs in the range of 41 to 44 cents per share.

This compares to last year's actual earnings of 63 cents per share in last year's [INAUDIBLE].

With that, we'll open it up for any questions that you might have.

Thank you.

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 questions will be taken in the order they are received.

Please stand by for your first question.

Gentlemen, if you could possibly stand closer to the speaker phone.

There's some static on the line from your end.

Our next question comes from Robert Drbul from Lehman Brothers, please state your question.

Good morning.

Good morning, Bob.

A couple questions.

I guess for Mark, on the Calvin Klein business, can you maybe give us an idea on the expected door count for the launches of the Men's business, and on the Women's side, you know, your expectations for, you know, door count or anything around that from a licensing revenue, from your standpoint?

If you could maybe give us some color around that?

Sure.

First, you have to understand that we're still early in the process, and from all accounts that we've had with retailers across America, we will sell those doors that we want to sell in those locations within the store that we want, with shop sizes that we think makes sense for both parties to enjoy the right profits and the right exposure for the brand.

It's premature at this point to tell you the exact number, because as you can well understand, we're very early in the process.

We will tell you, however, that it's very clear that the projections we've put in place for getting shops open and distributing this product are on plan, and we feel very confident about that.

Okay.

Manny, can you give us an idea on the numbers -- your guidance has it staying the same -- can you give us an idea on the cash flow expectations for the year?

Yeah, Bobby.

Our previous guidance has been that we have a cash outflow for the year of approximately $20 million, and the outflow relates to about $50 million of outflow related to the Calvin Klein integration and transition.

We're currently -- I think we've improved on that and we'll be closer to break even cash flow to about $5 million outflow for the year.

A good portion of that has to do with the Gant sale that we completed in the second quarter this year.

That contributes to about $14 million of cash this year, and then we would have done better by about somewhere between $5 to $6 million.

Cash flow's running ahead of projected.

Okay, great.

Thank you.

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

Please state your question.

Good morning, and congratulations in a tough environment.

Thanks, Jennifer.

You're welcome.

I wanted to know if you could give us a little bit of color as far as, in your -- at your retail level which brands were doing better than other brands.

I know you ran a negative, I think you said, mid single digit comps.

And if there were areas or categories that performed better than others?

It's an easy and a hard question to answer.

It's really an easy question.

They are all performing the same.

We, of course, look at the different chains run by different merchants to validate our view of whether it's a merchandising [INAUDIBLE] to the source of traffic.

And when they all go back and forth all over the place, it basically says to us it's -- it endorses the concept that it's traffic.

Because they're all performing very similarly, Jennifer.

There's no real success out there and there's no real killer out there.

They're all performing on the same level.

And, frankly, that's the same when you drill down into by product classification.

It's just a dearth of traffic to these centers.

Okay.

That makes total sense.

And then one other question.

When, you launch the IZOD brand, as far as the IZOD stores -- outlet stores, will we eventually see IZOD Women's in the outlet stores?

And I wondered if they were going to be specially made up for those stores or if you can give any color on that?

The IZOD Women's products -- we have retained the right to develop and put product which is consistent with the brand imagery for IZOD in the stores.

That's not part of the Kellwood license.

So the product you see in traditional retail will not be the same product that you see our stores, by and large.

Will it be changed?

Will what be changed, Jennifer?

The aesthetics of the product.

No.

It's very much in the total control and under the purview of the various merchants that control IZOD.

It will be -- it targets consumers the same, the product will be the same, everything will be the same.

Well, what I meant was, is it going to be different than what's in there right now?

No.

We're quite pleased, particularly with the Women's product in the retail stores; we're quite pleased with the product.

Okay.

And if anything, it's outperforming the IZOD Women's apparel.

Of course guys don't shop.

Just kidding.

Thank you very much.

Okay, Jennifer.

Thank you.

Our next question comes from Susan Jenson from Lehman Brothers, please state your question.

Hi, it's Scott Lemon calling in for Susan.

We've heard similar comments from other retailers that the environment's getting better and we certainly hope that it does.

Could you provide any indication of how your retail stores have performed so far in August, or if it's really better to wait until after Labor Day to get a good idea of what results are going to pan out for the third quarter?

For us it's better to wait until after Labor Day, and I would argue I don't think we'll have a clear picture until mid-October, remembering that our locations are quite different than typical retailers in permanent population areas.

Our -- what we're looking and watching to validate is that the weakness in our sales are coincident with the weakness in the travel industry.

And that when that becomes less important, which begins after Labor Day, that we'll start seeing a rebound.

So we're going to be watching these numbers very, very carefully from two weeks from now, first of September, through Columbus Day.

And I think that's when we'll be positioned to assess where we are.

Great.

And one last question, if I may.

You guys mentioned that the retail stores were forced to be more promotional, as were many other retail outlets.

Can you comment on how much your gross margin was affected in this quarter versus last year's comparable quarter?

Yes.

The vast majority, the reason why the gross margin fell, is down this year, has to do with our retail stores.

Okay.

[INAUDIBLE]

Thanks, Manny.

You're welcome.

Thank you.

Our next question comes from Carla Catella from J.P. Morgan.

Hi.

My question relates to -- I've seen a number of new competitive offerings that will be rolling out about the time of your better sportswear lines roll out.

I'm wondering if you've had discussions with retailers or what you would think would be the most -- are there any of those that you're more worried about than others, in terms of competitive rollouts?

We're very excited about the better sportswear center with Men's and Women's because there's a general weakness in the desire for newness and freshness in the better sportswear segment.

So it's the general segment rather than any issue pertaining to one brand or another, that is why we are excited about it.

Our faith and our confidence and our excitement is [INAUDIBLE] by the fact that we don't think anyone has a brand close to ours in the Calvin Klein and that's why, when Mark comes back from overviewing the different teams, putting together the Calvin Klein product, we get real excited when he endorses the work that they can do.

So, the answer is, we're worrying about ourselves.

We're entering a segment that the retail community needs a shot in the arm, and we think it's great.

Okay.

Great.

That's all I have.

Thank you.

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

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

Okay.

Thank you all for joining us.

And we'll look forward to seeing you at the end of the third quarter, and Manny will be in touch with you as the quarter, with events, if there are any events, we'll be notifying all of you.

My colleagues are laughing at me and my respect for Regulation FD.

Okay, have a good rest of the summer, everybody.

Thank you.

All parties may now disconnect.