PVH Corp (PVH) 2004 Q3 法說會逐字稿

Good day everyone.

Welcome to today's Phillips-Van Heusen Corporation third quarter 2004 conference call.

Today's call is being recorded.

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The information made available on this Web cast and conference call contains certain forward-looking statements which reflect PVH's view of future events and financial performances as of November 16, 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 the 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, an 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 on the Company's Web site and in the Company's current report on Form 8-K (technical difficulty) refurbishes (ph) and the SEC.

At this time, I would like to turn the call over to Bruce Klatsky, CEO.

Please go ahead, sir.

Thank you very much.

Good morning everybody.

I am joined this morning by Manny Chirico, our Chief Financial Officer, as usual; and Pam Hootkin, our Treasurer and point person on investor relations.

Mark Weber is traveling on business for us and might indeed be listening.

Well, needless to say, we are quite pleased with our results and that which we distributed last evening.

It is particular gratifying for us, because our whole management team and all folks have been working very hard to perfect our business model, to create the business platforms that we have so that we could deliver the kind of results that you are starting to see.

And we feel cautiously optimistic.

It is just the beginning.

Let me try to take you through each of our business components to help you understand where we are and where we hope to go.

At our cornerstone or legacy business, our Dress Shirt Group, continues to be strong; strong market leaders with very, very important positions in Van Heusen, Izod Kenneth Cole, Geoffrey Beene, of course Calvin Klein, and performing exceedingly well for us, Arrow.

We feel very good about the strong market positions these brands have.

They continue to drive our Dress Shirt business.

Interestingly and very exciting for us is -- we are in the midst of 4 brand new launches that we only have partial years this year and we are quite optimistic about.

They are MICHAEL Michael Kors, BCBG Max Azria, and Sean John in the department store channels.

Sean John will be shipping in the fourth quarter.

We are optimistic and feel good about the results we have seen about those brands, and are equally and very excited about what we'll be shipping also in the fourth quarter, and that is the new Chaps offering in the mid-tier channel.

So not only are we quite pleased with the leadership position and our current position, but we are thrilled to death that we have 4 significant new initiatives moving us forward.

In the sportswear component of our business, the news is equally -- or if we can believe it, even better.

Our Izod business continues to be a very, very strong performer, significantly contribute to the department store business on the main floor.

Our products sell-throughs have been terrific.

The margins for both our retail partners and ourselves have been quite good.

And the retailer has particularly shown a strong appetite for broadening the presentation of Izod into products such as jeans, pants and our PerformX, or our active component to our Izod product.

So we feel really good about that.

Arrow in the mid-tier is performing very, very well and substantially diversifies our distribution channel strategy.

And Van Heusen continues to perform well.

And we look towards expanding the product offering there in the department store channel.

I think most of you who follow our industry are aware of the fact that the consensus is that of the new entries in men's better sportswear, the outperformer has been Calvin Klein.

Our sell-throughs have been exceedingly well.

Our margins, our retail partners' margins are good.

We feel very good about that.

We feel very good about the product and the way the consumer has reacted.

Of course the strong brand recognition, but the product the teams have created have done quite well.

We -- Ken Wade and his team are in the midst of evaluating the degree to which we will allow that to grow next year.

We are -- his team evaluates a by door sell through.

We only want the consumer and the retailer to have a very good taste for this brand.

So we are evaluating that quite carefully.

At the present time, I would guess we will probably expand the doors next year by about 50 percent.

But we won't put it in a door that cannot carry that product and what it stands for.

And we are just feeling very, very good about that.

Moving into the broader Calvin Klein licensing operation, very strong momentum there; the strong sportswear launches have helped us significantly.

Mark and I met with the folks at Unilever last week, and they are quite pleased with Eternity Moment, the new Scarlet Johansson-promoted fragrance subset of Eternity.

They feel very good about their fragrance business in general.

They are hard at work on a new campaign for this summer for the CK One, which was so successful in Europe last year, and are -- and premature, but we are thinking about perhaps another major fragrance launch next year and feel quite good about that.

You are all aware, I think, of the success that Warnaco was having in both jeans and underwear.

Underwear is literally on fire.

Jeanswear is doing quite well.

We are thrilled with that.

We are very pleased with the jewelry launch.

We are very pleased with the ophthalmic eyewear launch.

We have a new coat licensee that is doing exceedingly well.

We like very much the placement that GAV has gotten in bridge sportswear in the upper tier -- the Saks Fifth Avenue bridge kind of Neiman Marcus distribution for Calvin Klein bridge.

Our jeanswear partner outside of the United States, Fratini, is quite pleased with what is going on there.

They are opening about 15 new stores this year, more stores in Asia.

Our bridge sportswear launch in southern Asia is going quite well, with store openings in places such as Malaysia, Hong Kong, Singapore.

We feel quite good about that.

We had a very successful opening of a collection store, which is wonderful for the image of the brand internationally, in Rome last week.

Tom Murray was out there and it went quite well.

We feel great about that.

We have a number of new initiatives which really won't hit us until next year and beyond.

We are working on how to distribute our sportswear product in Europe, have a number of exciting opportunities there, working on launching accessories both better and bridge the end of this year into next year.

Footwear -- Calvin Klein footwear, which is nonexistent in United States below the collection level in spring of '05.

We think we have an agreement in principle on color, that is cosmetic (ph) product, which we think will be significantly strong for the brand.

So not only are we exceeding our expectations in the royalty stream currently coming in for Calvin, but the new initiatives and the demand for new initiatives is creating a lot of exciting vibrancy in our organization as we look to how best to expand and grow what we clearly now know is the strongest brand in the world.

We think it is just -- the potential is rather remarkable.

Finally, before I turn it over to Manny, I should say that refill (ph) (technical difficulty) component of our business is quite -- is pleasing us.

It has improved substantially from where it was.

And I feel very good about the contractions that we have done over the past several years, and will conclude this year, that limit our exposure only to the best retail locations and factory outlet centers, and think that not only have the profitability of these divisions improved, but the volatility that it used to introduce into our numbers has largely been eliminated because of the smaller concentration of business we have in this area.

So with that, I will turn it over to Manny.

Thanks Bruce.

Let me start by saying that all my comments for the third quarter are before restructuring costs.

As Bruce said, we're quite pleased with the third quarter results.

Total revenues from ongoing businesses grew 9 percent in the quarter to $473 million.

The improvement was due to 34 percent increase in the Calvin Klein royalty revenues as well as increases in our sportswear business, particularly Calvin Klein and Arrow.

From our retail business, our comps for the quarter were plus 1 percent.

And we're right on plan from where we expected them to be.

EBIT for the quarter increased 33 percent over the prior year to $55.4 million or 11 percent of total revenues.

This represents a 240 basis point improvement over last year.

This increase was driven by strong revenue growth, coupled with higher gross margins across all businesses.

From a business segment perspective, our Calvin Klein segment recorded a 40 percent increase in operating earnings over the prior year due to our revenue growth from existing licensees and new licensees.

The 30 percent improvement in our apparel segment was driven by higher revenues and higher gross margins, due to more full price selling and the introduction of the higher margin Calvin Klein better men's sportswear line.

In addition, the limited rollout of Calvin Klein outlet stores in premium malls, coupled with the improvement in our existing retail business and the closing of underperforming outlet stores, enabled us also to achieve earnings growth in our retail business.

Net income increased 43 percent to $30.6 million from $21.5 million last year.

Earnings per share in the third quarter increased 37 percent to 59 cents a share, which was 9 cents ahead of both our previous guidance and consensus estimate.

From a balance sheet perspective, we ended the quarter with $12 million improvement in net debt over the prior year.

Our inventories are very clean and are up only 4 percent over the prior year, even though we are planning a fourth quarter (technical difficulty) of approximately 20 percent.

Receivables, despite a 4 percent earnings increase in the third quarter, are actually down 13 percent due to significantly less markdown allowance chargebacks from retailers and excellent collections.

Looking ahead, given our strong third quarter results, we are raising our 2004 earnings guidance to a range of $1.29 to $1.30 per share, which represents a 32 to 33 percent increase over last year's 98 cents a share. (technical difficulty) For the fourth quarter, we are continuing to estimate earnings to be in the range of 15 to 16 cents per share.

Looking out beyond this year, we continue to be comfortable in our ability to grow our earnings at a 15 to 20 percent range while growing our revenues at 5 to 6 percent per year.

Please keep in mind that beginning in the third quarter of next year, in accordance with the new expected FASB pronouncement associated with expensing of stock options, that we will begin expensing stock options in the third quarter.

We currently estimate that the impact for next year will be 5 cents per share.

This amount will need to be deducted from all of your 2005 earnings growth projections for next year.

With that, we would like to open it up for any questions that you might have.

(OPERATOR INSTRUCTIONS).

Jeff Klinefelter, Piper Jaffray.

First of all, congratulations on an outstanding third quarter to the whole team. (multiple speakers) A few questions for you, (technical difficulty) try to make them brief.

First, Bruce if you can talk a little bit generally about the business, now heading into the spring season of next year.

I think a lot of people are trying to figure out how long can the momentum in -- just in general out there in apparel sales go.

What are the comparisons versus LY spring season in terms of your business and (technical difficulty) opportunities you have to expand that business, maybe talk a little bit about the various components of your sportswear and CK as it relates to the spring season?

A second question would be on the new Dress Shirt launches -- just a reminder on the number of doors per brand that you are launching.

And then finally, on the gross margin -- Manny, you mentioned a number of things about the growth margin strength.

Can we get the magnitude of the markdown reductions or the markdown drop requests coming from retailers year-over-year for the third quarter?

And is there any sort of magnitude in terms of how much product you have got available to go into the off-price channel?

Okay Jeff we will try to (laughter) -- I think the best way to look at the business is the way I tried to articulate it at the outset.

If you take Dress Shirts -- 1 -- the leadership position in our historic brands -- Van Heusen, Arrow, Izod, Kenneth Cole, Geoffrey Beene and to a degree Calvin Klein which has been around for year or so with us.

Our market share is stable and growing slightly.

Going forward, I think a lot of the growth is going to be coming significantly from Michael Kors, BCBG, Sean John, which is a latter half of this year into -- we didn't have them last spring, and of course Chaps.

I do not have the exact door count for you as it pertains to those brands, except obviously the Michael Kors the BCBG and Sean John will be in far fewer doors than Chaps, which will be more broadly distributed through Kohl's and will be a larger revenue business, we think, because of that.

And we'll be moving forward with the Kohl's expansion.

So that is where I see that growth.

I think Arrow is (technical difficulty) significantly as well right now.

So I don't want to put numbers on -- any more numbers on it than that, Jeff.

In the sportswear area, all of our brands continue to grow.

Strong performance of Izod basically is going to permit us to continue the broadening of the product -- specifically, as I said, jeans, pants, and PerformX, a more active product for Izod.

The one statistic I would share with you is -- as we are currently in, as you know, little more than 250 doors for Calvin.

By and large, they are all performing well.

And we think we'll open another 125 doors or so in the Calvin sportswear area.

So I think our smell of spring looks very good.

We have got to get through Christmas.

Inventories are very lean.

The pipeline seems to be very clean.

I don't see any reason for business to slow down.

I will leave it to you macroeconomists to tell me how the consumer is going to react.

But we -- for our brands and our channels, which are the bulk of the channels out there, consumers are reacting quite well to our products.

And it has been an awful long time for me where I have seen sell-throughs that I am seeing now, at the margins that I am seeing now, which improve both our profitability and the retailers' profitability.

I've got just one follow-up.

We are hearing that young men's as a category was not maximized, in the specialty channels was not maximized nearly as much this spring as women's.

And so a lot of retailers are looking for young men's.

And I guess by extension it would be men's as well (technical difficulty) your areas as an opportunity for spring.

So just trying to get a feel for that, if you continue to see that build through the balance of the year.

And on a comparison basis, the comps are not that difficult in the spring season from last year?

That is true.

We don't play aggressively in young men's area, as you know.

I'm not sure I'm prepared to embrace your connection between young men's performance and men's performance.

We have generally stayed away from young men's because we have not been able to find a concept that we think is enduring.

Maybe it is an oxymoron; a young person just isn't super brand loyal, tends to jump on trends and more importantly, jump off trends faster than (technical difficulty) people.

And it doesn't necessarily -- hasn't historically fit with our culture, as opposed to a brand like Izod where there is strong loyalty, lots (ph) (technical difficulty) of commodity, universal product that appeals to a whole lot of people.

While we do a lot of our marketing, targeting a younger 20-something customer, which is not the young men's customer, of course.

But it is a huge amount of that product that is aspirationally sold to 35 to 45 to 50-year-old folks.

So we think that business is very sustainable.

And the comparisons for next year should not present a problem for us.

Great.

Magnitude of markdown reductions in off-price business --?

Yes.

Jeff, when you look at our gross profit on sales, taking the Calvin Klein licensing mix out of it, we are up about year-over-year both for the 9 months and the quarter.

We are up about 250 basis points.

I would estimate that 75 percent of that is due to a reduction in markdowns, both in wholesale channels from retail accounts and in our own retail stores.

And the balance of the 25 percent is really coming from cost savings and some mix issues as we go to the higher-priced Calvin Klein men's business towards the second half of the year.

So that's the way I would look at it. 75 percent of it is a reduction in markdowns.

Good luck with the holidays.

Adam Abramson (ph), Lehman Brothers.

I am calling in for Bob Drbul.

I was hoping you could give a little more color on the comp results, the breakdown between apparel and footwear, and then what the comp plan is for the fourth quarter.

The comp results between apparel and footwear were right in line.

They both ran ahead about plus 1 percent.

And we are planning both of those businesses for the fourth quarter at the same level -- about plus 1 percent.

Then for the CK outlet stores, the Calvin Klein outlet stores, what is planned for this year and next year?

We are opening, as we said, over the course of the next 5 years, about 75 stores.

We should have something in the order of 30 opened by the balance of this year.

Noelle Grainger, J.P. Morgan.

First, Bruce, on Calvin Klein men's sportswear -- could you elaborate a little bit more in terms of what is working best within the merchandise mix in the stores?

And perhaps is there any kind of sell-through data you would be willing to share?

And then I have a question for Manny.

I think it is very premature to start -- we have been in there for a couple of months.

It doesn't appear to be anything that is not working.

We are experiencing sell-throughs of 5 to 7 percent -- top of the heap from what we are told; no markdown support required of consequence.

We feel real good about what is happening with that product and only see significant upside, not only with the door count that I alluded to earlier.

But a number of retailers have approached Ken and chatted about enlarging the space already.

Ken and his team have been very, very cautious only to permit Calvin Klein to go in where we have good traffic space that we are happy with.

And out what is happening (technical difficulty) the strong results is -- people are opening the conversation (ph) (technical difficulty) when we built it larger, move us to other locations.

There is a strong trend in the industry and a strong need for good, contemporary, modern classic-looking product that is somewhat universally greeted by the consumer.

And Calvin seems to be fitting in perfectly.

So that is the way I think I will leave that, Noelle.

Is that okay?

Yes.

Let me just follow-up.

In terms of long-term, how do you think about the door count, particularly related to your comment about maybe making some of the more productive shops larger?

How do you balance growing the business but not taking it down too far in terms of C doors, D doors?

Would you be more inclined to go for larger shops?

Absolutely.

I want to go for larger shops.

I think that the energy -- Ken has this great phrase, Ken Duane, he likes to create a lot of energy.

And the larger shops give us that energy.

And the performance of the product that they said is now -- we have some 15 -- 1700 square foot shops, but we have a lot of 6, 7, 500 square foot shops.

And I would love to expand those.

And I am not prepared to quantify how much of that is going to go on next year.

But there is lots of conversation with major retailers to do that next year.

So that is number 1.

I want larger shops.

Number 2, we are going to expand the door in that -- I think we're comfortable by about 50 percent next year.

That's about 170 more doors or something like that, growing to about 350, 370.

Beyond that, we kick that around a lot here.

We have the luxury of having a lot of demand for the product and generating a lot of good revenue and profits.

So we are not going to do anything for the short haul.

But I think the consensus amongst Ken and his team is that we would be in the neighborhood of 600 doors when we're all done.

I think that is where we would end up.

Manny, could you -- your fiscal '04 sales outlook implies some pretty big growth in the fourth quarter.

And I think you even said around 20 percent.

Can you walk us through the new businesses?

Or really, what is driving that?

That is a pretty significant acceleration from your year-to-date run rate.

Yes.

Sure Noelle.

It is really been driven by -- in a couple of areas -- the new Dress Shirt launches.

We have got holiday being launched and fixture fill.

And then right after that, because of our year end being January 31, we have got the fixture fill for spring starting up on those new launches that -- there's no sales in the prior year.

So that's pretty significant increases there for those businesses.

We also have in sportswear -- the Arrow business continues to expand significantly, as well as the Izod business.

And then finally, we had always planned our retail business to be strong in the fourth quarter.

And it is really been driven by the store closing program.

We're closing most of the stores just about the end of January.

We have got about 60 (ph) (technical difficulty) stores closing in the fourth quarter.

They are driving a lot of volume as we liquidate merchandise.

But they are also driving at relatively lower margins.

But it has all been planned.

It has been there from the beginning.

And we are very comfortable -- where we see that all coming out at this point in time from a sales point of view.

We are very comfortable with the sales projections.

The wholesale numbers are in hand.

And as I said, the retail comps are really only being planned at plus 1 percent.

So we are comfortable with where we see it all falling out that this point.

So on a consolidated basis, because of the retail liquidation, do you still expect you'll get some gross margin expansion for the quarter?

No; in fact, just the opposite.

We are planning -- just as a moment in time, the fourth quarter -- because of -- particularly the store closings and some incentives that we are building in with our retail customers with the Dress Shirt launch to start up those businesses, we have set those businesses up at lower margins.

But it is a 1 quarter issue.

Just working through inventories and the going out of business sales, I would expect that we would see (technical difficulty) gross margins down 150 to 200 basis points for the quarter.

And then we get back on the trajectory that we're seeing.

(OPERATOR INSTRUCTIONS).

Brian Wayne (ph), Buckingham Research.

I'm actually calling in for Lee Backus.

And we would both like to add our congratulations.

Most of my questions have been answered, but we were just wondering -- is there any anomaly shift or anything from early shipments or anything from Q3 for the CK?

And why was it so strong this quarter?

Is there anything weird about that or no?

No.

No.

As most of (technical difficulty) apparel companies, which is driven -- driving a Calvin business, the third quarter is by far their largest.

And they just secured more market position in the third quarter.

So there is nothing strange going on in the third quarter.

Okay.

Also what expectations should we have for the fourth quarter for the licensing?

When you look at it, we are planning revenues up for the quarter about 20 percent.

And the licensing component of that is up about 15 percent.

And why would that trail off so much from this (MULTIPLE SPEAKERS)

Why?

I think you should look -- if you look at first 2 quarters growth, the growth is running in the 11 to 12 percent range.

The third quarter, with some of the new launches that are going on and some fixture fills that have gone on with that business, and we're just -- that's what we're comfortable with right now, is 15 percent growth.

Also, just 1 quick follow-up.

On the Izod, I know you guys said you're going to (technical difficulty) looking into new classifications and stuff.

But I was just wondering for the Dress Shirts, would you look into any new doors?

I'm sorry -- for the sportswear, would you look into any new doors with the current classifications?

I think that the growth in Izod is going to be more fixtures and more space in the existing doors.

Elizabeth Montgomery, SG Cowen.

Congratulations on a really good quarter.

I have a question about the Calvin Klein licensing stream longer-term.

When you look out over the next 5 years and you plan for a greater mix of the royalty revenue to really (technical difficulty) reduce (ph) the operating margin, at what point do you decide that maybe there is an opportunity for the CK Calvin Klein in the U.S.?

And how do you balance the risk of growing the brands through a lot of licensing agreements while still keeping it streamlined and ensuring that it remains aspirational (technical difficulty)?

What was the last word?

I'm sorry.

Ensuring that it remains aspirational.

Whether -- whatever agreement we sign, these agreements are tightly controlled that give us absolute authority over distribution, product design and marketing.

So we are being very careful in how they are structured.

We are very careful.

The demand for this brand (technical difficulty) for (ph) products is really not to be believed.

We turn away far more request than we even enter into a dialogue or a discussion about.

The brand is inappropriately (technical difficulty) applied (ph) to many products and inappropriately applied to others.

And we are being very cautious about that.

If we were interested in the short-term, as good as our earnings were and project to be for the current year, they are insignificant compared with what they could be if we were loose and prepared to just take advantage of every opportunity that is presented to us.

So we are being very careful.

The opportunities that we are aggressive about in the short-term, by that I mean next year getting them set to move forward, is CK sportswear outside the United States in Europe.

We are working with a number of people to determine how best to do that.

The demand is quite significant there.

Footwear globally, which is only in the collection area -- that is important to us.

Accessories globally, that is important to us.

And we don't think there's anything to diminish the quality of the brand.

And to your question about CK, we do have an arrangement and have shipped product, which I urge you to look at at Saks Fifth Avenue and Neiman Marcus, the CK bridge line in women's sportswear that GAV is doing now.

One of the things that we are most pleased about is the brand was largely seen around the globe.

I'm now talking about the global markets in jeans and underwear.

What we are feeling very good about now is the average price for product and the kind (technical difficulty) of product is substantially broadening around the globe right now.

The introduction of sportswear line, the accessory lines that we are going to see, the jewelry, the watches -- Calvin is becoming a much more broader perception of a brand on different products, which we think inures to the benefit of the brand.

And of course we are closely watching distribution.

We are not permitting Calvin to be distributed downstream, so to speak.

(OPERATOR INSTRUCTIONS).

Jeff Klinefelter, Piper Jaffray.

Just quickly on retail, Manny can you repeat again?

I think you said that comps in the third quarter were up 1 percent or on plan?

Bruce, you mentioned that things are getting better in retail.

Could we get a little flavor for over the quarter, kind of on a monthly basis how comps trended?

And then any peek you want to give us into how this early holiday season has started for retail?

Let me start and let Manny finish with the numbers for you.

The message I want to deliver about retailers, we have succeeded in reducing retail to be a complement to our business.

It is important to us.

It does a lot of things for us.

But the major accomplishment is we have eliminated or substantially mitigated events (technical difficulty) volatility (ph) that existed there because of the bad real estate.

And that will be concluded in January.

Our business has gotten better over the past few weeks.

And whether you want to talk -- this is an early start to holiday, the in end of leaf (ph) season, I don't know.

We generally look to get our read for holiday after Thanksgiving, Thanksgiving weekend.

But certainly, if you believe the way the consumer is reacting now in our retail stores as a predictor of what they will do for holiday, then I feel very good about that.

Okay?

Okay.

Great.

And then what was the comp by month during a quarter?

Jeff, we don't get into it by month.

But it was pretty straight across.

Gentlemen, it appears we have no further questions.

I'll turn the call back over to you for any closing or additional remarks.

Thank you all for joining us.

I am pleased we were able to deliver the results that we have delivered.

I want to complement my colleagues, Allen Sirkin and the Dress Shirt team.

I get in trouble when I drop the names here, so let me stop right there.

Our management teams have done a terrific job.

They have built business models that are enduring and we think are starting to -- have gained and really building momentum.

We feel real good about the stability on which this business model is built and what we'll be able to do going forward.

Thank you all.

We'll speak to you in the next quarter.

That concludes today's conference call.

Thank you for your participation.

You make disconnect the lines at this time.