PVH Corp (PVH) 2004 Q1 法說會逐字稿

Good morning and welcome, ladies and gentlemen, to the Phillips-Van Heusen Corporation first quarter 2004 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.

The participation in the Q&A portion constitutes your consent 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 May 20th, 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 estimate 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 in the Company's website and in the Company's current report on Form 8-K furnished to the SEC on May 19, 2004.

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

Please go ahead, sir.

Good morning.

Thank you for joining us.

I'm joined by Manny Chirico, our Chief Financial Officer, and Pam Hootkin, our Treasurer and Principal Executive responsible for shareholder relations.

Mark Weber, our President, is currently in the air en route to Asia.

Needless to say we're very pleased with our first quarter performance.

We are experiencing a situation where all of our pistons are working simultaneously and our brands are performing exceedingly strong in all channels of distribution.

The first quarter was very strong.

It would be disingenuous not to observe, the comparisons were easy with last year, but we exceeded our expectations in that context.

The second quarter has also started quite strong.

I refer, of course, to all of our wholesale businesses and our retail business.

If you reflect on how we are this year versus where we were last year, not only have we done much better than we did last year across the board, but our inventory situation, whether in our own facilities, stores, or in the retailers partners' inventories are very, very clean.

Our products have performed exceedingly well through Easter and beyond and, therefore, our mark-down exposure through the balance of the year is in much better situation than it was last year.

So we are cautiously optimistic that we are positioned very strongly for the balance of this year, and as Manny has said, and will say shortly, we are increasing our earnings expectations for the year.

Just a couple of quick comments by segment.

Our dress shirts business is continuing to outperform and are very strong.

We have three new initiatives in place for this year that will kick in during the year, but really not impact us until next year significantly.

One is the new BCBG Max Azria line of dress shirts, the other is MICHAEL Michael Kors dress shirts, both of these are for department store distribution, and we have reached agreement and signed a contract with Ralph Lauren for the Chaps brand for the mid-tier channel of distribution.

I often say that our dress shirt business is no growth, but we keep having these new initiatives and think that they bode well for the future of our dress shirt business.

Sportswear, IZOD business has done much, much better than it did last year, it's performed exceedingly well at retail, we're quite pleased with that, as well as with our other sportswear initiatives.

We are comfortable that our Calvin Klein better sportswear offering for men will ship this summer in time for back-to-school selling and everyone is very excited about that.

Our expectations have been fulfilled in terms of locating shops in about 250 doors in the United States.

We're quite pleased with the locations that we've gotten and are optimistic that when we deliver the product, the consumer will react strongly there.

Lastly, just an observation, we have been meeting with all of our Calvin licensees over the past couple of months and I'm very pleased by the attitude of these licensees.

They're all raising their plan slightly for the current year.

They feel good about what we're doing, they feel good about our new sportswear launches.

Unilever is going to be launching a new fragrance in the fall of this year, we are anxious about that.

We think that will be terrific for the brand.

They have signed Scarlett Johansson to be the spokesperson for that.

She's, of course, one of the hottest actresses in America.

And if there was another hot actress that we would have with Calvin, it would be Hilary Swank, and she is going to be the model for a new range of lingerie from Warnaco that we're quite excited about.

So all in all every piston is working, we're quite pleased with what we've done in the first quarter and we are cautiously optimistic that the balance of this year will be equally strong.

I'll turn it over to Manny.

Thanks, Bruce.

Let me just start by saying that all my comments concerning our first quarter results are before restructuring costs.

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

Total revenues from ongoing businesses grew 7% in the first quarter to $381 million.

The revenue increase was generated across all business units, particularly our dress shirt and Calvin Klein businesses.

In addition, our retail divisions posted a 5% comp-store sales increase for the quarter.

EBIT for the quarter was $25.6 million, or 6.7% of sales.

This represents a 130 basis-point improvement over last year.

The increase was driven by higher gross margins across all divisions.

We experienced strong sell-throughs coupled with very clean inventories at all levels of distribution, which resulted in significantly less promotional and clearance activity during the quarter.

Net income increased 42% to $11.1 million from $7.8 million last year.

This increase was fueled by our apparel segment which posted a 37% increase in operating income, and was driven by the continued strong performance of our wholesale apparel businesses, coupled with positive comp-store sales across all of our retail formats.

Earnings per share in the first quarter was 18 cents, which was five cents ahead of our previous guidance and consensus estimate.

This compares with earnings for last year's first quarter of 11 cents per share.

From a balance sheet perspective, we ended the quarter with a $78 million improvement in our net-debt position over the prior year.

Our strategic initiatives, principally exiting the wholesale footwear business allowed us to reduce receivables by 15% and inventories by 23%.

Looking ahead, given our strong first quarter performance, we are raising our 2004 earnings guidance to a range of $1.13 to $1.18 per share, with the second quarter earnings in the range of 24 cents to 25 cents per share for the quarter.

And with that Bruce and I 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 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.

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

Your questions will be taken in the order they are received.

Please stand by for your first question.

Our first question comes from Bob Drbul from Lehman Brothers.

Please state your question.

Good morning.

Good morning, Bob.

Two questions.

First one for you, Bruce, would be when you look at the level of promotional activity, both in your own retail stores and then sort of at the level at retail, do you have any idea in terms of the quantity of the reduction in promotional activity that you're seeing year-over-year?

The second question is, when you look at the Calvin Klein, the licensed royalty stream for this year, for the full year what would be your expectation in terms of the growth year-over-year from last year?

The promotional activity, Bob, is substantially down.

It's very hard for me to quantify it across the board, but it is substantially, substantially down.

In some areas, certainly less than half of what it was last year.

Okay.

But it's meaningfully down, and it's making us feel good about any margin obligations we might have with our retail partners, and, of course, the cleanliness in our own inventories.

And as far as the licensing income, we see it up 10 to 12%.

Okay.

Great.

Thanks.

The Calvin Klein licensing income.

What's that, I'm sorry, Bruce?

The Calvin Klein licensing income.

Okay.

All right, thank you.

Our next question comes from Lee Backus from Buckingham Research.

Please state your question.

First, great quarter, guys.

Congratulations.

Thanks, Lee.

Second, Manny, could you discuss the closing of the outlet stores, how that's going and when you see that being completed?

And also maybe you can just discuss some of the outlet store business was certainly great in Q1, obviously over the easiest comparison.

How do you see that business trending considering gasoline prices and just generally what's going on in the outlook for the business?

I'm going to answer the financial question.

I'll let Bruce deal with the gasoline question.

We've closed 50 stores so far.

As we said, when we initially made the announcement, we would expect the balance of the store closings the way our leases are running, the most efficient way to close the stores are post Christmas.

So we would anticipate the balance of the store closings to take place in late December.

We're focusing very hard on the stores.

As you can imagine with this positive store comp it's helped all stores, including the stores that we continue to close.

So the cash flows, even from the stores that are closing, continue to be very positive, and we're looking very hard at the economics, whether it makes sense to close the stores as quickly as we anticipated.

So we're moving very quickly, very focused on that area, and we'll continue to be stringent going forward.

As far as our trends, the trends for -- our plan for the second half of the year, for the next nine months is a positive comp store of 2% compared to the first quarter of plus 5%.

So we're comfortable with that estimate.

And we've started out the second quarter quite strong, and feel good about that, one.

And, two, as far as the gasoline price issue, Lee, we've been sensitive to that issue, but prices are already up quite high, particularly on the West Coast, and we have felt no change in traffic patterns, and I've been reading the same articles you've been reading.

It doesn't appear to me that -- the consumer is not liking it a lot, but it doesn't seem that they're driving a heck of a lot less.

We're in touch with the tourists associations around the country, as you know a lot of stores are driven in tourist locations and the projections for travel and tourists attendance at theme parks and whatever is very strong for the summer.

Disney, for example, is sold out through the summer, so we are optimistic that that trend is going to help our business.

So I guess we feel good.

Also, maybe you could discuss, certainly the department stores and your customers had a very good first quarter.

Discuss their outlook for the back-to-school season, what they're seeing, any trends, do they think this momentum will continue?

I think there's a very healthy attitude out there.

Nobody is letting business run away from them.

Everybody's being very careful in their inventory commitments, in their planning which I think is a very, very healthy thing.

It's in periods like this when we don't overbuild inventories that we tend to make a lot of money.

So I like what I see happening.

So I would say everybody's cautiously optimistic.

Everybody is, I don't know whether we've been beaten up the past couple of years so much that we can't take good news, but we all love what's happening out there.

As recently as right through last weekend business continued strong.

Our future bookings are very good.

Of course, we have a significant percentage of our booking that's EDI replenishment business.

We're prepared for that.

We're prepared to react to that.

I guess everybody is cautiously optimistic, but nobody is overreacting, Lee.

Thank you.

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

Please state your question.

Hi.

My first question, actually a housekeeping item, do you have the Capex number for the quarter?

Just give me a second.

Okay.

Well, while you're looking for that, do you have any -- have you announced any plans -- you're building a pretty large cash balance now and we show it growing throughout this year.

Any idea what you'll do with the excess cash?

We are very comfortable with our cash flow.

We are very pleased with the improvement in our net-debt position.

We don't have any plans for using that cash right now.

Okay.

And with the store closings, will your rent expense change dramatically this year?

Sounds like most of it is going to be after year-end.

No, the rent expense will not change dramatically this year.

Okay.

It will be more a next year event?

Yes.

On a comparable basis, on a full-year basis, the Capex for the quarter was $4 million.

Okay.

And what was the earn-out to Calvin Klein, or is that something that's done annually?

Is that not done quarterly?

No, we pay it quarterly, it's $5 million.

Okay.

And lastly, on the preferred stock, are you now paying that cash and intend to continue to pay that cash, or will it go back to PIC?

We paid it cash, our intention is to continue to pay it in cash, but we have the option to change that in the future.

Okay.

Great.

Thank you.

You're welcome.

Our next question comes from Noelle Grainger from J.P. Morgan.

Please state your question.

Hi, good morning.

Good morning, Noelle.

A couple of things.

First, your gross margins were very, very strong in the first quarter.

Manny, I think you had previously kind of indicated that you thought gross margin for the year would be up 100 basis points.

Are we going to see now, that's going to be up more for the year and maybe SG&A is ticking up a little bit, too, from mix?

Well, the SG&A, as we've talked about, will pick up as the Calvin Klein business picks up.

The expenses associated with running the licensing business are higher than on our base business.

But, again, we're anticipating gross margin improvement somewhere in the 120 to 140-basis-point area for the full year, and we're not anticipating that we'll have as strong a gross margin performance as we had in the first quarter, but continued improvement year-over-year.

Okay.

Bruce, can you talk a little bit more about Calvin Klein women's sportswear in terms of your performance at retail?

We've heard very good things.

Would you characterize it as running ahead of plan or on plan at this point in time?

What have you learned so far?

Have you seen any price sensitivity, and how are the bookings?

One, the Calvin Klein women's business for us, we're going to experience about twice the royalty payment that we anticipated and built into our budgets because they're advanced bookings were a lot stronger than they or we anticipated they would be.

So from our standpoint, we feel very good about that.

The product has been in the stores for I guess about eight weeks now.

I think I'd rather have Kellwood answer that question for you.

My own view is it's premature for me to really answer, as you know, Noelle, they ship the career piece of it first and only will be shipping the casual piece shortly.

And that's important because I think the casual piece has a broader customer base than the career piece and its price points are significantly lower.

So I think to get a real accurate picture of what's going on, I think we have to wait until it's all shipped.

But from our standpoint we're very pleased.

Twice the revenue we thought we would get, and I think you'd learn more if you spoke to Andy Grossman or Alex Vreeland on that.

Okay.

And then finally, on inventories, down 20%, really very, very clean, do you have enough inventory?

And, Manny, if it's not one thing, it's another, right?

Do you see inventory as a source of cash on a full-year basis?

Let's start out and say we have plenty of inventory.

I see inventory -- as far as quarter, there's a dramatic -- there's about a $24, $25 million reduction in comparable inventory due to Bass.

So having the Bass wholesale inventory out of the equation year-over-year is worth about $23 million, but even with that, our inventories are down about 15% on a comparable basis.

So I think that's fine.

There's plenty of inventory to do the business we have, it's very clean, and I think our margins are really positioned well to continue to benefit due to the cleanliness of the inventory.

On a year-over-year basis, I think inventory will be a slight benefit from a cash flow point of view year-over-year, somewhere in the $10 million range.

And that would include also the buildup of the Calvin Klein sportswear launch.

So I think overall it will be a slight $10 million benefit.

Okay, great.

Thanks very much.

Thank you, Noelle.

Our next question comes from Jennifer Black with Jennifer Black & Associates.

Please state you question.

Let me add my congratulations.

I wondered if you could update us on how many doors you're in in the women's Calvin Klein and IZOD and then where you would expect to be in the next year, a year from now?

And then also on IZOD women's, the same thing.

I really would -- we are currently in 125 Calvin Klein doors, and I don't want to give you a wrong number on the IZOD doors.

It's more broadly distributed, as you well know.

Right.

IZOD is going to be a much faster ramp-up in terms of the number of doors.

I want to say that we're going to get to 600 to 800 doors, but I don't want to say that right now.

I just am not sure, Jennifer.

I'd suggest you get that from Kellwood.

Okay.

Ask the folks for that.

Calvin is currently in 125 doors, and I think the judgment as to how rapidly we ramp that up is probably going to be reserved until after we ship the casual sportswear.

But I would see us getting to 300 to 400 doors there, but, again, I'd like you to ask that question of Kellwood.

Okay.

And then another question.

I wondered if you had plans to open outlet stores, stand-alone outlet stores for those brands.

No.

Okay.

And then lastly, can you give us an update on where you stand as far as the China -- the quota?

I'm assuming that you have plenty of quota because you guys have always done a great job sourcing.

Can you just give us your take there?

Yeah, I'm trying to understand where your question is coming from.

If your question is referring to the issues that have been mentioned in the press about quota shortfalls in 2004, because there's no quota in 2005, and therefore no forward borrowing permitted, we don't have any issues there, so we should have no difficulty.

We see no problems in shipping 2004 forward.

Is that essence of your question?

That's the essence of my question.

Yeah, we're fine.

And as far as if you see anything going forward with the classifications that you have.

Will you pass the savings along to the consumer?

Do you know at this point, or is it going to vary channel by channel?

I think it's going to vary, I don't think anybody knows for sure exactly what's going to happen.

The issue is, A, how much of an offset from these price savings is the currency, the weakness of the dollar going to have over the course of 2005.

B, there's been an increase in raw material costs in textiles because of polyester staple and cotton, so how much that offsets that.

And, C, how much the suppliers themselves try to hold on to, then there's the question of what we pass through to the consumer.

People are doing everything from passing something through, nothing through, increasing the value of the product that we're selling, putting more make into the product, those kind of things.

So I think that those things are yet to be determined.

That's why we are not being aggressive.

We aren't budgeting major margin improvements as a result of reduced costs, but we're very comfortable that we will continue, as we always have in sourcing, of it being a serious competitive advantage for us, but we just don't think it's wise or prudent to project any major profit improvement in 2005.

There are two many unanswered questions, not the least of which is whether or not the government executes its surge mechanisms to protect China from disrupting the marketplace in the world by way overshipping, and no one's really quite sure about that.

So I think that's a big unknown.

I don't think it will be an issue for us, and it has the potential of being a positive surprise, but I like it.

Okay.

Thank you.

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

Please state your question.

Hi.

I guess I was just wondering, with the strong cash position, do you expect you need to draw on the revolver this year, and if so, when sort of the peak would be.

Would it be second or third quarter?

No, our plans right now show that we won't be borrowing into the revolver at all.

Okay.

We will be in a positive cash position for the year.

Okay.

And as far as any further restructuring costs for the year, would that sort of fall in the fourth quarter related to the rest of the outlet closings?

I think, the way the GAAP accounting is now, with severance and certain other costs, you're just not allowed to anticipate the charge, so you have to wait until you actually let the employees go from their positions.

So we will continue in a significantly less amount than in the first quarter.

We'll continue through the second, third, and fourth quarter to have some level of restructuring charges going through.

And some of that will relate to the Bass transaction, basically mostly relating to severance, and then in the fourth quarter, as you said, the last piece will be with the final store closing piece of it.

So it will be complete by the end of the fourth quarter.

And about how much of that will be cash?

Well, about 70% of the charge will be cash, is what we're anticipating.

The overall effect of the two initiatives, the elimination, the licensing of the Bass wholesale business, coupled with the close-down of the stores, net of all the charges, should have a $30 million cash flow positive benefit to the Company, and that benefit we'll be able to anticipate over the next 18 months.

I hope that answers your question.

Okay.

Yeah, that gives me a pretty good idea.

Are there any other remaining integration issues, what have you, with Calvin Klein?

And I guess the other question was initiatives that you haven't already talked about today in terms of product extension, et cetera, that are in progress.

Remind us of that.

The integration is over.

There are no other integration issues remaining.

As far as other initiatives, there are lots of them.

We bought this brand because, as we said before, the enormous potential and the strength of the brand and the small sizes of businesses.

Mark Weber's going to Asia right now, as I said, because we see there's an opportunity to substantially grow our business in Japan, and he's been taking that on as a project and working with our various Japanese licensees.

We've got a new launch of the CK bridge line that we're doing quietly in Southern Asia with a group out of Singapore, we'll have four stores opened by the end of this month, I think, between Kuala Lampur and Hong Kong.

We've got people who want to take the sports wear ranges to Europe, we've got a number of people who are pursuing us for better footwear licenses, men's and womens.

We're having discussions about accessory businesses.

We're being very cautious about those things, haven't built any of those things into our financials, but there's lots of activity going on in that regard.

The only thing else that's a little bit more real that I can report, I was at the International Watch and Jewelry fair a couple weeks ago in Basel, Switzerland and the Calvin Klein launch of costume jewelry and a broadened range of watches was just not to be believed.

The booth was flooded.

I mean, they're going to quadruple their budget.

They're reluctant to tell us, but they are doing much more than they thought we would do.

So there's lots of activity and opportunities moving forward.

Thank you for the update.

Our next question comes from Margaret Mager from Goldman Sachs.

Please state your question.

Hi, Bruce, Manny.

How are you?

Welcome back, Margaret.

Pam, hello.

Yeah, welcome back.

Thank you.

I wanted to just ask you if you wouldn't mind please commenting specifically on the moderate channel of distribution, how things are trending there for you and broadly speaking in the men's area.

We are doing very well in the moderate channel.

I understand there's some questions about Kohl's.

In the men's business we're not feeling it.

Our business is very, very strong.

I would echo that for Sears and Mervyn's as well, although there is some uncertainty as to the future of Mervyn's.

But our big business in the moderate channel is between Kohl's and between Sears, and it's doing very well.

Now we're limited to men's product and we feel very good about what's going on with the Arrow brand and we're looking forward to some interesting discussions regarding the Chaps brand in dress shirts in that channel.

Just on Chaps quickly, will that be Chaps Ralph Lauren or just Chaps?

Just Chaps.

Okay.

With regard to just your observations on the men's business across the market, you're in a great position to say very insightful things there.

I know you said IZOD sportswear is doing really well and dress shirts are doing really well.

Can we take away that men's is bottom broadly and picking up?

How would you interpret that?

I would definitely say men's is doing much better than it was a year ago, it's doing much better.

And we're particularly excited about that because we think we're going to be shipping the Calvin Klein men's product into an ebullient market, which is always nice.

That's not only is the consumer reacting strongly, but maybe as a result of that, inventories are very lean.

Right.

What do you think -- what are the catalysts that are causing the men's business to turn the corner and start to turn up?

I'm taking it that you see it turning up rather than bouncing along at a trough level.

Yeah, well, I sense a firmness in the market, Margaret, and why men are starting to spend, I don't know.

Everything is in cycles, and I had a fascinating discussion yesterday.

I was out in Dallas with a couple of colleagues in the industry at a meeting, and it was suggested that in periods of rising interest rates when perhaps real estate slows down or big-ticket purchases slow down people tend to, particularly men, to be more comfortable buying more cyclical smaller-ticket items.

We've experienced that periodically throughout my history in the business, and perhaps that's part of the explanation, but I don't know.

Right.

It's interesting, because, I guess probably the last big uptick in the men's business was casualization and the khaki craze and everything else, and it's been kind of punk ever since.

I'm just wondering what you think the reasons why it might be picking up again are, but thank you for your thoughts.

Okay.

If you have anything to add, let me know.

Okay.

Let me ask you also, on your gross margin outlook, just taking your comments and putting them together a little bit, your outlook for the sourcing picture is you're not counting on lower costs for 2005.

And right now as we look at 2004, you're commenting that your gross margins are improving, largely because of lower markdowns year-over-year.

When we get to 2005, taking those two things together, it doesn't sound like there's a lot more room for mark-down improvement, and we're not looking for cost reductions.

Do you think gross margins stop the expansion that we've seen really for a couple of years now in the industry when we get to 2005?

Well, Margaret, we've got a couple of dynamics going on in our business.

One is, our royalty revenues continue to grow.

So that's going to continue to drive our gross margin higher.

Great.

Secondly, the new Calvin Klein businesses are a substantially -- the in-house businesses, both dress shirts and sportswear that are really rolling out in a big way, are much higher gross margin business than our more moderate than using in IZOD businesses.

So that will also continue to see an improvement in gross margin.

And as much as we haven't put in our projections, significant cost savings coming from quota, we are doing -- I didn't want to give anybody the idea that we have -- we have a number of mechanisms in place.

We see significant cost reductions occurring.

The question is, will we be able to capture and keep as much of those as we'd like.

And right now that's an open question.

So we will continue to look very hard on that line, but our projections going out show a continued improvement in gross margin in 2004 and beyond, somewhere in the 40, 50 basis points, but most of that is being driven by mix of business as opposed to cost savings benefit.

Right, I understand mix.

My question is really more comp related.

But let me narrow it a little bit and ask specifically about markdowns.

Do you think by the end of this year, or even if you look at your first quarter results, that your markdowns are about as low as you could hope for them to be, or do you think that this industry can continue to improve markdown levels by tight inventory control for another year?

Well, I guess, Margaret, we're one quarter into the year.

Our strength that we've seen so far has surprised us on the upside.

I'll have a better sense on margin and markdowns when the season truly ends in June, when we see all the clearance that comes through, and I'll be able to probably give you a better answer than that.

We continue to strive to do better, but I think we are getting to certain optimal points in some of our businesses that markdown allowance money and markdowns in our own stores, it gets to a point where I don't know how much better it can get.

Okay.

Correct me if I'm wrong, but my take-away from your up in your earnings guidance is that you're doing it because you see such good selling and lower markdowns that you're comfortable that you're not going to have markdown exposure looking out.

Did I interpret that incorrectly?

That is correct, coupled with a 7% sales increase.

That's correct, and there might be a margin improvement if that happens.

If that plays out, it's reasonable to say that there's more opportunity in the margin line.

But we're not recognizing that right now because we're just not prepared to tell you that.

Okay.

But the opportunity exists, to your specific question.

Then just last question, I figure I'm the last questioner here, but the Calvin Klein royalties, you're looking for 10 to 12% growth in your Calvin Klein royalties this year.

What would that be on a comp basis without new initiatives?

I don't mean the new -- taking the launching of a new fragrance.

I just mean if you took the Kellwood piece out of it.

Margaret, there's so many new initiatives going on, I understand what you're trying to say, I would guess it's in the 3 to 5% range, somewhere in that, but I'd have to go back and really run that number.

It's a very complicated number, Margaret, because you've got Warnaco bringing their business down by contract with us because they were overdistributing the product.

So that's a good thing.

We've got the underwear business picking up, we've got the fragrance business picking up, we've got the eyewear business picking up, and those are the big ones.

We've got the watch business and the jewelry business, the watch business picking up, the new initiative in jewelry, so I think the picture I think you should have is the major existing licensees are doing substantially better.

Okay.

All right.

Well, that's very helpful.

I always appreciate your thoughtful comments.

Thank you, everybody.

You're welcome.

Thank you.

We do have a follow-up coming from Lee Backus.

Please state your follow-up.

Yes, on the Calvin Klein royalty, as the royalty grows, what kind of increases do you need in your expense level, or another way of looking at it, what kind of leverage do you get on that?

How much of it flows to the bottom line?

Lee, generally it's marginally incremental increase in expense.

But with a launch such as the women's sportswear, we've heavied up some expenses, we've got some design expenses, we've got start-up expenses associated with the men's business.

But in a normal year, 2005 and beyond, as we layer in incremental licensing revenue, there will be some level of incremental expense, but it would be relatively small.

So it's a very leverageable business, but when you're launching new businesses you have some start-up costs, and that's what we have in '04, which we've consistently talked about.

So '05, I think you could really see a real flow-through as that line grows.

I would think it should be somewhere around a 70% flow-through on the growth.

Okay.

For modeling purposes, just looking out to '05, what kind of growth will it be, a reasonable growth expectation for licensing for Calvin Klein?

We've given some -- I don't think I'm ready to give that number yet, Lee.

Okay.

Thank you.

Once again, ladies and gentlemen, as a reminder, should you have a question, please press star one at this time.

Ladies and gentlemen, as a final reminder, should you have a question, please press star one.

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

Thank you all for joining us.

We look forward to speaking with you again at the end of the second 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.