PVH Corp (PVH) 2004 Q2 法說會逐字稿

Good day, everyone, and welcome to today's Phillips-Van Heusen Corporation second quarter 2004 conference call.

Today's call is being recorded.

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 written -- express written permission.

Your participation in the question and answer portion constitutes your consent to having any comments or statements you make appear on any transcript or rebroadcast of this call.

The information made available on this webcast and conference call contains certain forward-looking statements which reflects PVH's view of future events and financial performance as of August 18th, 2004.

Any such forward-looking statements are subject to risks and uncertainties indicated from time to time in the Company's 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.

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

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

At this time, I would like to turn the conference over to Bruce Klatsky, Chairman and Chief Executive Officer.

Please go ahead, sir.

Thank you very much.

Good morning, everybody, thank you for joining us.

We are, of course, extremely enthused and pleased by the trajectory of our business and the results we've achieved to date, this year, and are optimistic about what our performance will be for the balance of the year.

Our view of the general business environment is that the year started off quite strong, spring was good for our product areas and our channels of distribution.

Business became somewhat spotty and slowed down in June and July and continues to be a little bit spotty right now, although it's premature to speak to August sales, I think.

But our brands and our products seem to be again outperforming the environment and we -- we have not in our -- our traditional channels of distribution seen a significant slowdown in our business from where it was in the first part of the year.

Our dress shirt group seems, again, to be on track for another record year, those of you that followed us knew that they had one last year.

Our core brands, Van Heusen, Arrow, Izod, and Geoffrey Beene are doing very well, our designer brands, Kenneth Cole, and, of course, our own Calvin Klein are doing quite well.

And, uh, our new launch, uh, BCBG, is doing very well.

And we are optimistic that -- that the performance of both Sean John and Chaps, which will be, of course, distributed in the mid-tier channel of distribution will perform exceedingly well when we ship those.

That is to say, Sean John and Chaps in the fourth quarter of this year.

So we feel very -- very comfortable and very positive about the performance of dress shirts.

I am pleased to say very similar words about our sportswear group.

It, too, seems to be on track to have a second year of record growth in earnings.

We continue to be very powerful drivers of business on the main floor in department stores in America with IZOD and Van Heusen; and the Arrow business is doing exceedingly well in -- in the mid-tier channel of distribution.

We feel real good about that.

But our sportswear team is really charged up about -- and has done an exceedingly good job with the launch of our Calvin Klein better sportswear product.

We told you we would be shipping that product in time for back-to-school.

The execution has been very, very well.

We have 175 of about 250 shops open.

The balance will be opened prior to Labor Day and is only -- not open right now because retailers are in the midst of some rehabs and they'd like to have the new Calvin Klein shop opened in conjunction with those things.

So that's right on plan.

In fact, our sell-throughs are surprising us better than planned.

The product seems to be very well-received by consumers, we're selling, I'm told, in the men's better sportswear area better than any new product launch.

And, uh, that has resulted in advance bookings for spring of '05 to be better than what we had initially anticipated, difficult to quantify, but the -- the demand for product seems to be significantly more than we thought.

So when you think about the fact that, um, in the -- the month we're dealing with right now, our Calvin Klein product on the men's side of the house, sportswear will increase its presentation in department stores by about 150,000 square feet.

We think it's very important to the Klein brand and very positive about PVH earnings, so we feel real good there.

Moving on to our Calvin Klein Group, the feeling there is equally optimistic.

All of our licensees are either performing at or slightly better than the plans they've submitted to us.

We are particularly excited about the new fragrance launch this fall, which will be driven by a major TV launch featuring Scarlett Johannson.

Unilever is very excited about that, as are we.

We feel real good.

We're seeing the momentum in the Calvin Klein brand pick up considerably, as we watch our -- our partners around the world begin to accelerate the opening of their -- of retail stores.

We have small collection stores up -- in Moscow and Rome.

There's conversation about others in other locations in Europe, both our CK Bridge sportswear relaunch in Asia and our CK jeanswear in Asia; there are more stores opening in Hong Kong and China and those stores are all doing quite well and we are closely looking at them and thinking about what kind of global coordination we could do to propel the brand even farther.

We are also very positive, just touching on a couple of other things, on the jewelery launch, as many of you know, SWATCH, our watch partners, uh, are -- are marketing a line of jewelery and will be marketing fine jewelery.

The reaction to that, as I reported last quarter, was very positive at the Vasil Fair and the resultant orders have been much better than initially budgeted; and that just contributes to our good feeling about the trajectory of the royalty stream and the -- and the brand presence of Calvin Klein around the world.

As I said at the onset, we feel good about the balance of the year.

This is particularly in the context of the fact that the -- the inventory pipeline in all channels of distribution, from what we can see, that we sell seems to be very clean.

And, uh, it's our experience that when that occurs, good business follows, as the need for price promotion and flicking the switch, bringing prices down is not as, severe regardless of consumer activity.

So our -- our margins seem to sustain themselves and we feel good about that.

Um, and, finally, what has been the historic components of volatility for our corporation, our outlook retail business, um, and the small Bass wholesale footware business that we had is no longer significant.

We've, of course, exited the footwear wholesale business so we don't have that volatility and our retail closing program over the past several years has reduced our exposure to that channel such that we don't think it should derail the plans that we see going forward.

So, I guess, bottom line, I'll turn it over to Manny with some real good feelings and he'll quantify this a little better.

Thanks, Bruce.

Let me start by saying all my comments in the second-quarter results are before restructuring costs.

As Bruce said, we were extremely pleased with our results for the quarter.

Total revenues from ongoing businesses grew 4% in the second quarter to $376 million.

The improvement was due to a 14% increase in the Calvin Klein royalty revenues, as well as in increases in our wholesale apparel business.

The increases were partially offset by a 4% comp store decline in our factory outlet business.

EBIT for the quarter was $30.4 million, or 8.1% of sales.

This represents an 80 basis point improvement over last year.

The increase was driven by higher gross margins across all of our business units.

Strong sell-throughs coupled with very clean inventories at all levels of distribution resulted in significantly less clearance activity and more full-price selling.

From a business perspective standpoint, our Calvin Klein segment recorded an 11% increase in operating earnings, uh, and that was really driven by all of the initiatives that we have in place for the brand and they're beginning to be realized and Bruce touched on all of those.

In our Apparel segment we also put on a 11% increase over the prior year, and that was driven, uh, totally by the strong performance of our wholesale dress and sportswear business.

In our retail businesses, our sales were impacted by a much lower level of spring-clearance inventory.

We made the decision not to promote that inventory heavily and that enabled us to maximize our gross margin dollars.

As we have entered August, we've seen a significant improvement in our retail comps.

They are now running at about plus 1%, as we've shifted from a clearance activity to a more traditional back-to-school full-price selling.

Overall, our net income increased 22% to $14.2 million from $11.6 million last year.

Our earnings per share in the second quarter increased 33% to 28 cents.

Uh, that was 3 cents ahead of both our estimates that we gave to you last quarter and -- and the consensus estimates that were out for the Company.

From a balance sheet perspective, we ended the quarter with a $62 million improvement in our net-debt position over the prior year, as our strategic initiatives to contract factory outlet store retailing and to exit the wholesale footwear business helped to contribute to a 13% decline in receivables and a 16% decrease in inventories compared with the prior year.

As we look ahead, given our strong performance in the first half of the year, we are raising our 2004 earnings guidance to a range of $1.18 to $1.21, which represents a 20 to 23% increase over last year's earnings of 98 cents a share.

For the third quarter, we are estimating earnings to be in a range of 49 to 51 cents a share.

This represents approximately a 15 to 20% increase over last year's third-quarter earnings of 43 cents a share.

And with that, we'd like to open up the conference call to any questions that you might have.

Operator, you can open it up for questions.

Thank you.

Today's question-and-answer session will be conducted electronically. [Caller Instructions] We'll go first to Bob Drbul with Lehman Brothers.

Hi, good morning.

Good morning, Bob.

Um, a couple questions for you, Bruce.

In terms of the Calvin Klein business, can you give us an update in terms of, you know, where you see the revenue shaking out, um, third and fourth quarter, you know, for the total launch for this year; and sort of has your long-term thinking in terms of total door count at all changed?

Um, no.

One, our long-term thinking has not changed.

It might accelerate somewhat because the sell-throughs have been better than we thought.

And this year, given inventory commitments and lead times and shop construction, uh, we are pretty much where we thought we would be, the number's solid, it'll probably approach $40 million in the fourth quarter -- I mean between now and the end of the year.

For our men's better sportswear, I assume that's what you're referring to.

Yes.

And how about on the women's side of it, is -- you know, have any feedback I know the license is to Kelwood I'm just curious in terms of how that is going as well, you know, sort of a coordinated effort?

Um, well, as you can match, we speak to Kelwood on a regular basis but I think you get a more thorough answer from them.

But from our standpoint, uh, the royalty projections are -- are better than what was in our initial plan and is consistent with what it's going to be.

They shipped in their career apparel, um, at Federated and May Company largely; but other doors as well, and it's doing okay.

We are very anxious for them to -- to ship the casual component of that, which is somewhat lower priced and we think will drive a lot of velocity and they're going to be shipping that just prior to Thanksgiving.

Okay.

And, um, in terms of like when you look this month and through the next several months, like if you had -- to highlight a couple of the key launches with your licensees and, you know, around the brand, what should we be looking for, um, you know, across the different categories?

I think the biggest -- internationally, I think in Asia you'll see store openings in sportswear and jeanswear, which I think should be of interest to you all, because it substantially -- supports already great brand recognition.

In Europe, the big story there is a very significant increase in Calvin Klein jeanswear, as much as 40% in advance bookings and sell-throughs right now, new product that's really working well in the stores.

Globally, the big thing is going to be Scarlett Johannson and Unilever and the new Eternity fragrance.

That we think is pretty terrific.

Um, and we're quite pleased with the performance of Warnaco.

While the jeanswear revenue is down somewhat it's because they're honoring the agreement to clean up the distribution.

They've been very successful with the junior's launch, which we think is -- is terrific.

Um, and the underwear business is equally -- equally strong.

Great.

If I could shift gears for a second.

Um, in terms of the core -- the sportswear business, can you elaborate a little bit more on the performance of IZOD and the dress-shirt business and, I guess, when you look at the launches in the -- in the fourth quarter, um, are there significant expenses that -- that you will incur in the fourth as you launch the new licenses in the dress shirt?

I'll -- I'll let Manny respond to the -- the expense question as soon as I'm done, but IZOD is doing very well.

It's very well.

The product is selling through exactly or better than anticipated, margins for retailers are very strong, therefore our margins are -- are very strong.

Um, the sell-throughs are terrific.

Brand extensions, bottoms, activewear are quite, uh -- quite successful.

The presentation of the IZOD product, because of the brand extension, is -- is terrific and is supporting all product that we're introducing.

IZOD Golf in department stores is quite strong.

So we feel very positive of IZOD.

Its performance this spring was much better than last spring and the momentum seems to be carrying it forward, so we feel very good about that.

And dress shirts, uh, our business, we're market leaders, and continue to be so and, uh, we really don't have any brand that's not performing in the stores right now in the -- in the new launch of BCBG, as I said, has been very good.

Um, and we are very optimistic that when we ship Sean John and Chaps that we'll have great performance there.

As far as the expense part of the question, Bob, Manny will take that.

Yeah, Bob, especially in dress shirts, when we launch a brand, the start-up costs for us are relatively minimal because we're able to layer in and take advantage of synergies of the dress-shirt group.

And you'll see -- we should see a good sales -- we'll see a significant sales increase in dress shirts in the fourth quarter, and that's projected, you know, a takeup in sales as those businesses start to get positioned for spring next year, and we'll get the benefits of that in the fourth quarter.

But the real earnings benefit will really come in the first half of next year.

Great.

And one final question, thanks, Manny.

One final question would be, um, around the outlet store closures, um, you know, just give us like sort of the update on the game plan in terms of where you are with that process and sort of what we should be expecting throughout the rest of this year.

Bob, we're right on plan consistent with what we've been saying.

We've closed year-to-date-- from when we announced the store closings, somewhere in the area of 50 to 55 stores.

The plan is the -- we made the business -- we made the strategic decision, the tactical decision to close the vast majority of stores right after Christmas this year to take advantage of the selling season to use it to clear inventory so we have no blips and I think you'll see the -- between -- you'll see a -- approximately 100 stores closed in the fourth quarter after Christmas at that point, as we work our way through.

So we're right on target, right on plan, and we think the pressures that that channel is under, the good centers continue to be good and the -- the weaker centers continue to be weak; that it was -- it was a real positive decision for us to contract that business and we continue to feel good about that decision.

And--I lied -- one more final question.

In terms of the Calvin outlet stores, can you just give us an update where you are with those stores and the game plan there as well.

The game plan there is as we've said is a much, much, much smaller chain of stores than anything we've historically had at PVH.

These are stores that are being opened only in the -- in the best outlet centers adjacent to brands like Ralph and Armani, etc.

We are on -- on -- on track there and -- and over the next number of years, we should probably approach 60 to 70 stores.

Great.

Okay.

Thank you.

We'll go next to Lee Backus with Buckingham Research.

Yeah, first, congratulations on a good quarter.

Second, I think Bob asked all the questions.

He's a pushy guy, Lee.

Uh, but let me try.

Yeah, I was interested in your comments about Arrow, you know, it says here that the moderate area is not performing as well as the better areas and Sears is certainly going through some major restructuring.

I mean, could you talk about the moderate end of your business?

You know, Lee, it's performing very well.

You know, I hear the same thing you do, and I watch the same thing you do, but our brands -- we have a group of our dress-shirt brands, and certainly IZOD and Van Heusen are moderate on the sportswear side, and Arrow in the mid-channel at Sears and Kohl's and-- both dress shirts and sports shirts would certainly be considered moderate.

But the sell-throughs there are very powerful.

We have no margin exposure to the retailers, which is our best handle on that -- on sell-throughs, as you know.

And I -- I really can't speak to the general conversation about moderate.

I guess our conclusion is we're outperforming the channel.

And we have a real-good pulse because of EDI.

The only other thing I would observe is I think, as we look at some of those folks' business, the women's business is tougher than the men's business; and maybe that's why we're doing -- doing well.

But I can assure you that -- that the demand for that Arrow product in that channel is very strong, much stronger than we thought it would be.

Is that also true for Van Heusen?

Yes.

Van Heusen is of course not distributed in those same--same channel, but, yes, yes.

Also could you talk about advertising spend for CK?

Um, any changes there?

What you'll see, uh, this year versus last year and next year?

I -- you know, I would say there's going to be no change.

Um, we've had some significant targeted experiments going on this year that CRK, our advertising agency's executed, we are positive about the Calvin Klein jeans that were in about 4,000 movie theatres this summer for all the blockbuster releases, we think that's helping the performance of jeanswear.

We're very positive about the 23 or $24 million that will be spent on television just in the U.S. for the Eternity launch with Scarlett Johannson in October.

We think that'l make a meaningful impact.

And the global spend for Calvin Klein will be north of $200 million, and for -- for next year we'll probably be up somewhere about 10% because of the growth in the licensing revenues that -- that contractually obligate our licensing partners to spend more -- contribute more money or spend more money on advertising, depend on the unique case.

So up, I would say, going forward about 10%, Lee.

And that's just -- that comes out of licensees' pockets, not yours.

Yes, that's correct.

Thank you.

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

Hey, congratulations, everybody.

Thank you.

Thanks, Jennifer.

I wondered if you could talk about any new trends you see for menswear, you guys always seem to know what's going on.

And, also, I wanted to know if you had any new licenses or line extensions with any of your brands?

Trends, I -- in menswear, um, I -- you know, I would think classic and traditional is coming back stronger than it's been in the past couple of years.

I think that's real good.

On the other hand, we see -- we talk about that, but on the other hand we see the more contemporary, modern, cleaner silouhette of Calvin performing.

So I think there's a healthy environment in men's.

I think there's a balance in look between both the traditional and the contemporary and modern.

Um, on the licensing front, uh, there continues to be significant demand and conversations going on around IZOD.

I have nothing specific to report to you now.

Calvin is rapping up a variety of licensing deals.

As you know, we're looking out to the future at an accessories opportunity, we're looking out to the future at a footwear opportunity; but I think, uh, we -- we believe internationally, we -- we want to lock up a strategy for sportswear outside of the United States principally in Europe and we're having some discussions and some thoughts there.

I think to be more specific than that is premature at this time.

Okay.

All right.

Thank you very much.

We'll go next to Christina Bonnie with Credit Suisse First Boston.

Yes, good morning, everyone.

Good morning, Christina.

I just have a couple of housecleaning items.

One, could you tell us what the earn out was to Calvin Klein in the quarter?

It was approximately, uh, $5 million.

5 million.

Okay.

And I know you upped your EBITDA guidance, could you give us a sense of your free cash flow target for 2004?

Free cash flow is continuing to hold in that -- that 10 to $15 million range.

We -- at the end of the year, with the launch of the new licenses that we talked about specifically in dress shirts, with the growth of the Calvin Klein business; you'll probably see a growth in our working capital, inventory and receivables, to support the sales growth that we see that's going to occur in the fourth quarter, and that we see happening in the first quarter.

So we're holding our cash flow estimates for the year flat at this point to where we were.

Okay.

Great.

That's helpful.

And just as you generate, um, free cash flow, can you give us a sense of if you thought yet about your '05 capital budget or where you see, um, redeploying capital, um, at this juncture.

From capital expenditures, I think we've been pretty consistent, talking about that we think once we get over this year's investment in Calvin and some of the shops and some of the things that we're doing, that we get back to a more traditional capital spend in the 30 to $35 million range.

Um, and we don't see any reason to change at that point.

Okay.

And just as a follow-up to that, I mean where do you see -- as you build the cash, what would be a good use of that cash?

At this point in time, uh, you know, we don't have amortizing debt and I think we -- you will start to see -- you'll see the cash continue to build on the balance sheet at this point; and we're looking at different strategic uses for that cash, and that's where we are.

Okay.

Great.

Thank you very much.

We'll go next to Colleen Mager with Goldman Sachs.

Thank you very much.

My questions were answered.

Can you speak a little louder, please?

Thanks very much, my questions were answered.

Thank you.

We'll move on to Carla Casella with J.P. Morgan.

Hi.

It sounds like you have a lot of -- planning initiatives in-house, I'm wondering what your outlook is for acquisitions?

Is there anyone out there that you're currently looking at or any areas of your business that you think you do need acquisitions to expand?

Uh, I -- I don't think we need acquisitions to expand.

I'm comfortable with the assets we have in the Company that we can grow and meet or exceed shareholder expectations with the assets that we have.

Having said that, I believe our industry is in a period of consolidation, in both the retail and wholesale segments.

And we need to be cognizant of what 's -- what's going on there.

So from time to time, we look at opportunities.

There is nothing presently seriously or close to any kind of deal.

Okay.

Great.

Thanks.

[Caller Instructions] And we'll go next to Greg Thomas with J.P. Morgan.

Good morning everyone.

Good morning.

Manny, just one question for you, I believe you've been targeting gross margin expense of 120 to 140 basis points and clearly 2Q was a lot stronger than that.

So do you expect that momentum to continue into the back half?

Or are you leaving your assumptions in place?

We're leaving our assumptions in place, Greg.

We -- the first half of -- was terrific from a -- an allowance point of view, with our department-store partners, a lot more -- substantial amount of full-price selling going on, very little clearance inventory to clear.

We're not building that same model into the back end of the year.

If you look, particularly at our fourth-quarter gross margin last year, we were well over 45% in the fourth quarter.

So when you layer in that the second-half margins last year were significantly higher, we've gotten a significant amount of the cost savings that we thought.

We're only planning for an expansion of about 100 basis points for the balance of the year.

That's 100 basis points in the back half?

Yeah, approximately in that range, yes.

Got it.

All right.

Thank you.

Good quarter.

Thank you.

And, gentlemen, at this time we have no more questions in our queue.

I'd like to turn the call back to Mr. Klatsky for concluding remarks.

Thank you for joining us.

Look forward to being with you next quarter and wish you all well.

Thank you.

Bye.

This concludes today's conference.

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