PVH Corp (PVH) 2003 Q4 法說會逐字稿

Good morning and welcome, ladies and gentlemen to the Phillips-Van Heusen Corporation fourth quarter and year-end 2003 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 the conference up for questions and answers after the presentation.

This webcast and conference call is being recorded on behalf of PVH and consists of copyrighted material.

It 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 webcast and conference call contains certain forward-looking statements which reflect PVH's view of future events and financial performance as of March 9, 2004.

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 statements, including, without limitation, any estimation regarding revenues or earnings.

The information made available also includes certain non-GAAP financial measures as defined under SEC rules.

A reconciliation of these measures is included in the Company's earnings release which can be found on Company's website and in the Company's current report on form 8K furnished to the SEC on March 8, 2004.

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

Please go ahead, sir.

Thank you.

Good morning everybody and thank you for joining us.

I'm joined as usual by Mark Weber our President;

Manny Chirico, our CFO; and Pam Hootkin, our Treasurer and point person on Investor Relations.

I guess as I reflect, many of you know I've been with PVH for 32 years and clearly last year was the most significant and interesting in my career here.

We are very pleased with all that has gone on.

Let me just touch on the highlights for you.

We closed the Calvin Klein transaction early in the year and completed the Klein integration exactly as we anticipated we would and had shared with you folks.

That is complete, on plan and we feel very good about that.

Our experience owning the Calvin Klein brand for a year, the short strokes are the opportunities are even better than we anticipated.

The strength of this brand and the opportunities and folks that are interested in it for a variety of products and variety of marketplaces is quite significant and really causes us to feel good about what we embarked on a year ago.

So integration done, opportunity significant.

On our core businesses, both our dress shirt groups and sportswear groups recorded record years.

They really had just did a splendid job in addition, they did that in a very difficult environment.

Both dress shirts and sportswear increased their market share, improved their operating margins, improved their inventory turns, on any standard it was a very powerful year for these two groups.

Our retail businesses which we consistently reported to you were a real challenge all year, the channel, that is the outlet channel, continues to contract, the bad centers continue to be bad and the good centers continue to be strong.

Having said that, just before Christmas our retail business experienced an uptick, particularly in the good centers and that uptick has continued right through the current time.

And we feel good about that.

A year ago we had very poor retail business, our profit projections were eroding, we were looking at a war commencing in Iraq, the consumers were just not there in any channel, but most particularly outlet retailing.

This year has started quite the contrary.

We have got a real wind in our sails, we feel good about that, and we'll see how the consumer behaves for the balance of the year.

But we're comfortable with how our remaining stores look.

On our strategic initiatives side, we think it was a terrific opportunity to license the Bass footwear business.

That transition to Brown Shoe is now over and done with.

We have shifted the operations of our Bass wholesale business to them, sold them the inventory, and those issues are behind us.

We think it's great because we think Brown Shoe is a fine footwear company that appears to be building a strategy of multiple brands in multiple channels of distribution, not dissimilar than our own dress shirt and sportswear strategy.

So having the Bass brand in the stewardship of a fine company as them, we think is terrific.

And of course, we've never been satisfied with our ability to operate that business in the profitability there.

In addition to that, we provided to close up to 200 outlet stores in the underperforming outlet centers in the country.

We think the combination of those two initiatives eliminates underperforming businesses for us and significantly reduces the volatility that existed in our earnings projections.

As I said, as we look forward into this year, the year has started strong, both our dress shirt group and sportswear group appear to be carrying forward the successes of last year, whether they're able to get every single cylinder pumping in their operations the way they did last year, I'm not sure, but it sure feels good to be starting strong.

And that counts double for retail.

So we feel good about that.

The CK, the Calvin Klein licensing business is on plan, we've got a few relatively small positive surprises there, we feel good about that.

Unilever, in particular, is optimistic about some new fragrance initiatives that you'll be hearing about during the year.

So we feel good about that.

The two Calvin Klein, large Calvin Klein initiatives, that is to say our own launch of the men's better sportswear business and GAV/Kellwood launch of women's better sportswear, as many of you know, has proceeded exceedingly well.

We are doing quite a bit better than we thought we would do.

The women's product is now appearing in stores, shops going up, those of you in New York can see it at both Bloomingdales and Lord & Taylor.

On the West Coast, Macy's San Francisco, the woman's product is in the store.

We're looking forward to see the sell through, the product itself looks terrific and the shops look wonderful.

The men's product will ship this summer.

That too has been received exceedingly well.

We will do significantly more business than we thought we would.

We're comfortable that our shop locations will be the premier shop locations in America, and we feel good about that.

Lastly, on the financial front, I need to congratulate my financial colleagues.

We completed the last piece of our financing package.

We refinanced our notes due 2008 at 9.5% interest.

We refinanced and took advantage of the low interest rate environment, and refinanced those bonds at 7.25% due 2011.

That means we have no maturities and no principal payments due until 2011.

So we're quite comfortable with our balance sheet from that perspective.

With that, I'll turn it over to Manny.

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

Total ongoing revenues in the quarter were $352 million, an increase of 12% over the prior year.

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

These increases were partially offset by a 1.5% sales decline in our retail businesses.

Even in the fourth quarter, before restructuring charges in the Calvin Klein integration course, improved to $23.5 million from $14.7 million last year.

This improvement was due to the addition of $11.4 million of earnings associated with our Calvin Klein licensing segment.

Offsetting this increase was the $2.9 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 businesses.

Which experienced weak sales and higher promotional selling in the quarter.

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

Resulting in a $3.2 million increase in interest expense, and $5.3 million of dividend on our convertible preferred stock.

Overall, earnings per share in the fourth quarter, excluding restructuring and integration costs, was 14 cents, which was at the high end of our previously announced earnings guidance.

This compares with earnings of 20 cents per share last year which were not impacted by the preferred dividends or additional the common shares associated with the CK acquisition.

From a balance sheet perspective, we ended the year with $133 million of cash, an increase of $16 million from the prior year, and significantly ahead of our breakeven cash flow estimate for the year.

Inventories at the end of the year are 5% lower than the prior year, and are quite clean from a clearance and markdown perspective.

Looking ahead to fiscal 2004, we expect full year earnings per share to be in the range of $1.10 to $1.15 with first quarter EPS in the range of 13 to 14 cents per share.

Such earnings per share amounts exclude the restructuring charges related to the exiting of the Bass footwear business, and closing underperforming retail stores, as well as the debt extinguishment costs associated with our recent bond refinancing.

With those comments, we'll open up the floor for any further questions that you might have.

Thank you.

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

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

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

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

Please stand by for your first question.

Our first question comes from Bob Drbul from Lehman Brothers.

Please state your question.

Hi, this is Adam Abramson calling in for Bob.

I was wondering if you guys could discuss the current and planned door counts for the Calvin Klein women's sportswear business, as well as the planned door count for the men's sportswear launch.

The women's are between 125 and 150 doors, and the men's will be between 240 and 250 doors.

Okay.

And long-term, what are the expectations?

I think we think there's probably a possibility of approaching 800 to 900 doors, but there's a lot to be learned based on the first shipment of product.

On the women's side of the house, the folks at GAV and Kellwood are price positioned at the high end of better, their focused on a career, more tailored looking product.

We want to see how that sells and how the additive of sportswear product would sell.

And building more core product there.

I think there's much to be learned from the first three to six months of product.

On the men's side of the house, the larger door count, as we are price positioned more competitive -- not necessarily the higher end of better but right in the middle, right against the competition, and so we're a little more comfortable having a larger door count, we'll have to see how the sell throughs go and make a determination there.

What's important is the quality of the sales and velocity of the inventory turn.

And on the revenue side, it will take care of itself.

Okay, thank you.

Thank you.

Our next question comes from Lee Backus from Buckingham Research.

Please state your question.

First, very good quarter.

Thanks, Lee.

You've been going through about, between last year and the year '04, pretty significant restructuring.

Do you think by the end of this year, are there any other areas where you think that restructuring is necessary, and I'm thinking specifically among your outlet stores?

Do you think you now have the right number of outlet stores considering the continued contraction in that industry?

We moved aggressively, Lee, in looking at these 200 stores so we think, based on what we can see happening in the centers, this should cover everything.

And in point of fact, we look at every door very carefully before we close it to be sure that there's no change in a particular center.

So we were very aggressive in that regard.

So I don't think there should be any additional store closings.

And I would think that these initiatives that you refer to should be behind us by the end of the third quarter.

And, yes, and we should look forward to a lot of very positive things as we look into next year.

Maybe Bruce you could reflect, '05 seems like the year when everything starts really coming together, and the restructuring is complete.

Could you reflect on the potential for '05?

I think your quite correct in your understanding.

We'll have a full-year of men's shipments, we'll have a full year of women's sportswear businesses, some other initiatives we're looking at are there.

We'll have all of the Bass and retail stuff behind us.

So I feel very good looking out into '05.

I would be reluctant to increase the guidance that we've given consistently that '05 would be a year in the 15 to 20% earnings growth area that we think we can maintain for a while.

I don't want to go beyond there right now, but you're quite correct when you say that everything will be behind us and we should have a lot of wind in our sails.

Okay.

Thank you.

Thank you.

Our next question comes from knoll Granger from J.P. Morgan.

Please state your question.

Hi, good morning.

Good morning, Noelle.

I'm hoping you can talk about a couple of things.

First for IZOD, I'm wondering if you can comment on what you view the brand opportunity in light of the likely competitive shift to moderate by a major name, as you look out to fall and into 2005.

I'll let Mark respond to that, Noelle.

Do you want to say specifically the modern name?

With Chaps looking like it's going to move to moderate, I would think it would present an opportunity for IZOD.

IZOD is already positioned extremely well at moderate prices in main floor department stores.

If that brand that you refer to makes the move you think it will make, it should bear well for IZOD.

We're already positioned, our brand extension beyond knits and woven shirts is very strong and we have great potential.

At the moment, in addition to doing what we're doing here, we're looking outside the country for opportunities in IZOD as well.

So we feel very good about that.

Are you launching new product categories in anticipation of looking to take some share in the department stores?

For IZOD?

There are still brand extensions available through licensing that we're looking at.

We announced, I don't recall the date, but a couple of months back, that we reentered the professional golf business again with a partnership with Tehama.

And our pant business in particular, both jeans and stain-free, wrinkle-free twills has performed very, very well in department stores and the response to IZOD as a brand is very strong.

And it should be pointed out that the launch of our women's operation in IZOD with Kellwood is significantly ahead of plan, and the sell-throughs have been very, very positive.

So there's still growth in the IZOD brand.

Okay, great.

And then on the retail side, can you give us a sense of kind of the cadence of the improvement that you saw in your business over the course of the quarter or late in the quarter?

And has it continued to accelerate or has it stabilized in the earlier parts of this year and kind of how are you thinking about your comp and margin expectations for that business for this year?

Okay, I guess in the fourth quarter our retail comps were slightly positive, about a half a percent positive, but it was really a pre-Christmas, the week before Christmas that portion from November through early December, our comps were running, continued to run at about the minus 5% range, post-Christmas, our accounts were running closer to 5 to 6% positive.

So it was a real turnaround in the business.

That momentum continued through February.

So we've had some momentum, as Bruce said, in the retail channel.

Our plan for the year is our comps somewhere in the area of 1 to 2% positive.

So we continue to plan the business at 1 to 2% range, we try to manage the inventory and improve the gross margin.

I think we'll see gross margin improvement overall somewhere in the 100 basis-point range driven by two components in our business, the retail improvement, year-over-year, and as our licensing revenue becomes a larger portion of our business on the Calvin Klein side, our margins, gross margin dollars will grow just based on the mix of the business.

Okay.

So that gross margin, that's on a consolidated company-wide basis.

Yes, that's on a consolidated company.

Okay, super.

Thanks a lot.

Thank you.

Thank you, our next question comes from Clark Orsky from KDP Asset Management.

Hi, I was wondering if you could translate your EPS guidance into EBITDA?

Sure.

I guess our EBITDA guidance for the year is somewhere between $147 and $151 million.

Okay.

And do you have a number that you're thinking about for capital spending?

Somewhere in the $38 to $40 million range.

Okay.

Could you also comment on how you think things are going with the CK Warnaco license?

As you know, there are two components of Calvin Klein's Warnaco business, one is jeanswear and underwear.

Underwear has consistently been strong, and they've had a number of product launches that have done exceedingly well.

Most recently something called "Pro Stretch" so their business is quite strong in underwear.

Jeanswear we've been quite impressed with Joe's management of that business, Joe Gromack [ph].

A lot new product innovation in all three segments of the business, juniors, women's and men's are starting to feel very good about what they're doing.

The product's been well-received in the marketplace.

Their distribution is much more controlled than it's ever been.

So bottom line, we feel very good about what's going on at Warnaco and feel very comfortable with Joe Gromack and his team.

Okay.

Did you talk about the Brown Shoe license previously in terms of what you think you might realize out of that for license revenue?

Initially?

We don't disclose agreements, the terms of any of our individual license agreements.

The Brown Shoe agreement will basically, for us, number one, eliminate a business that's always been marginally profitable for us and reduce volatility for PVH and have the benefit of having a substantial amount of product distributed in the marketplace which will enhance the brand and some fairly significant marketing contributions to the Company.

Okay.

And then, I guess, I don't know if you give any guidance on sort of what kind of savings you think will come out of SG&A based on some of the actions you've taken?

Well, I think the predominant area there with the Calvin Klein integration, I think we've captured those savings in fiscal 2003, and we're somewhere between $22 to $24 million of cost savings associated with the Calvin Klein acquisition that have been realized.

And then with the elimination of the bad business, there's a significant elimination of expense, but at the same time, there's also elimination of sales and gross margin.

The business, as Bruce said over the last three years has been breakeven to a small operating loss.

So it will be a positive from that perspective getting out of the business.

The store closings, closing those 200 stores, those stores overall lost somewhere in the neighborhood of about $2 million, so it will be benefit overall of improving profitability by getting out of those 200 stores.

Okay, thank you.

You're welcome.

Your next question comes from Jeff Kobulars from Salomon Brothers Asset Management.

Please state your question.

Hi.

Your comps and your outlets running up 5 to 6% or so, can you say, are you discounting to get those sales or are margins roughly the same year-over-year?

Margins are slightly better year-over-year, February's a normal clearance month, so there's normal clearance markdowns going on, but year-over-year markdowns are improved over last year.

Okay, great.

Year-over-year margins are improved over last year.

Right.

Okay.

And can you comment about your intention on the preferred dividends, in '04, to pay them in cash or to pick them?

Our intention with the strong stock performance we've had is on common side conversion price of $14 is to pay cash this year on preferred dividends, but we always reserve the right to go back and pick but the plan right now is to pay cash.

Okay, great.

And then lastly can you comment about inventory levels at your retail customers at this most recent year-end versus prior years year-end?

I think the pipeline's clean.

All right, thank you.

Thank you.

Our next question comes from Michael Shrekas from Delaware Investments.

Please state your question.

Thanks, guys.

Most of my questions had to do with the Bass business, and those have been answered.

One other thing was, with regard to the launch potentially of a Calvin Klein retail store, I had gone to a store down in Jackson, New Jersey that seemed to be maybe a prototype and was fairly impressed with it and just wanted to see what your plans were on in a end?

We're in the middle of experimenting with a number of those type stores.

We probably feel we could have a chain of those type stores similar to maybe a little less than Ralph Lauren or Armani or other high-end brands in very prestigious centers.

I would guess over five years, we might approach something on the order of 75 stores.

Okay, thanks.

Thank you.

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

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

Thank you all for joining us, we look forward to having you join us at the end of the first quarter.

Thank you, and have a good day and good week.

Thank you.

This concludes the conference for today.

Thank you all for participating and have a nice day.

All parties may now disconnect.