PVH Corp (PVH) 2004 Q4 法說會逐字稿

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

Today's call is being recorded.

This webcast and conference call is being recorded on behalf of P. V. H. and consists of copyrighted material.

It may not be recorded, reproduced, retransmitted broadcast downloaded or otherwise used without P. V. H.'s express written permission..

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

The information made available on this webcast and conference call contains certain forward-looking statements which reflect P. V. H.'s view of future events and financial performance as of March 17, 2005.

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 under take any obligation to update publicly any forward-looking statement including, without limitation, any estimate regarding reveniews 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 website and in the Company's current reports on form 8-K furnished to the SEC.

At this time I would like to turn the conference over to Mr. Bruce Klasky.

Please go ahead, sir.

Thank you, Amber.

Good morning, everybody, thank you for joining us.

Obviously, we are elated with the results of last year.

They largely speak for themselves.

A few opening comments.

Fundamentally, all of our pistons are pumping and working splendidly.

The strategic positioning of our brands in the various channels of distribution around the world are working exactly as we had hoped they would.

None of us can remember a time when all the components of our business have worked in such a consistently excellent way, and we are just thrilled and very proud of it.

Calvin Klein is more than a year ahead of our business plan, probably closer to two years.

Our existing licensees have completed quite strong years, Improvements that Tom Murray shares with us, he can't remember they've had,.

Particularly of note is the jeans performance in the United States, underwear globally and Unilever in the fragrance area.

Our Bridge and Jeans stores for Calvin in Asia are doing quite well.

We are quite close to announcing a partnership for Bridge Sportswear in Europe and, hopefully we will be talking to you about that over the course of the next quarter.

Our new accessories and footwear licenses are posed to launch later in this year.

And, of course, our Better Sportswear launch has beat the competition in the year just concluded.

Fundamentally, the broader brand performance available to the consumer, the more products out there have inured to the benefit of all of our licensees and Calvin business, as the brand is, if it's possible, becoming even stronger than it was when we acquired it.

So we are quite thrilled with what's going on at Calvin.

In our legacy businesses, if you will, our dress shirt group performed wonderfully last year.

I smile when I reflect with conversations we've had with many of you that our dress shirt business is supposed to fundamentally be a slow-growth or GDP performer because of the maturity of the U.S. dress shirt business and the large market share that we have in our leadership position.

But our dress shirt group went out in the fourth quarter of last year, launched four new brands: BCBG Michael -- Michael Kors, Sean John and Chaps, while maintaining their market leadership.

And yesterday we had an exciting event at Macy's to mark the launch of our new Donald Trump dress shirt line.

So, those five brands, none of them were in our plans for the first half of this year, and we're looking forward to significant profit contribution from them, as well as the wonderful execution that's been consistent coming out of that group.

Our Sportswear group fulfilled its promise as a growth engine for the company.

Izod continues to garner more market space -- market share, with more retail square footage in better department stores in the United States.

They are doing that by broadening their product offering, whether it's jeans, whether it's more active related apparel, golf apparel or recently introduced more luxurious range of merchandise.

So Izod continues to go and continues to be a wonderful brands for your Company.

This same sportswear group is responsible for a wonderful launch in Better Sportswear.

It was executed to do perfection.

We only had a half a year of that Better Sportswear in our numbers last year, and we look forward to annualizing it in the year upcoming.

We anticipate growing doors by something on the order of 50 percent, from something like 250 to 375 doors.

Our retail businesses have been rationalized and contracted to be positioned largely in sustainable factory outlets.

This business has become a compliment, rather than a driver, of our business.

The combination of the rationalization of that business and, as we mentioned before, the license of our Bass shoe brand to wholesale footwear company and eliminating it from wholesale mix has dramatically reduced the volatility in our business, which in addition to everything working well, we substantially eliminated the downside that perhaps might have existed historically.

A quick word about the Federated/May Company merger.Federated may company merger.

As many of you know, the combination of those two tour groups comprise about 12 percent of our revenues.

Our position, although its premature to understand exactly what's going to happen, essentially we feel if it's good for the department store industry, it's good for us.

We think this quite good for them.

We think Terry will lead this newly configured group extremely well.

We have strong positions in both stores, so we are optimistic that this will be a good thing for our industry.

We had some questions about some of the speculation in the press that Federated will be selling some of its retail locations where there's duplication duplication or what have you.

It's too early for to us comment on that.

I will just point out that to you that our multi-brand, multichannel strategy puts us in a wonderful position there if some of those stores are sold to other retailers.

The odds are that we have an important branded position in those stores as well.

I think today's call should largely be about the wonderful performance of our team over the past year.

Let me just take a moment to comment on the succession plan that we announced a short while ago.

Personally, 34 years is a long time to be in one place.

I made the decision and began discussing it with the Board in the fall, largely because we had just completed our budget and three-year planning process, and the trajectory for our company looked absolutely outstanding.

And it was a wonderful time to make this change.

We gained greater confidence that we would be able to achieve our earnings growth targeted, least 15 to 20 percent, all of our businesses were working, all of our brand positions were wonderful.

That was compounded by the fact that the Calvin integration was completed and as, I said earlier, running significant ahead of plan.

When you look at all of those things, study our cash flow, study the fact that the industry is consolidating, that we have an incredibly strong infrastructure with excess capacity, there are bound to be new opportunities for us as we move forward.

And I felt strong that will those new opportunities should be led by the management team of the future, which is of course, Mark Weber and Mannie Chirico.

I probably am most proud of the fact that this is a non-event.

As many of you know, Mark and I have partnered for the past 33 years, and as he has been quoted as saying - words and music.

It was a wonderful partnership and we were interchangeable in our various roles over those years.

Mannie joined us a little more than a decade ago, and the triumvirate of the three of us has been a wonderful experience for me.

And the team of Mark and Mannie moving forward will be seamless.

This is a non-event for the corporation.

I am particularly grateful to many of you for the kind calls and e-mails that I have received, and thank you for that.

So with that, I will turn the call over to Mannie.

Okay, thanks, Bruce.

I am going to try and quantify some of Bruce's comments.

Let me just start by saying our fourth quarter results are before restructuring costs, and when I speak about them, as Bruce said, we are quite pleased with our fourth quarter results.

Total revenues grew 14 percent to 16 in the fourth quarter to $414 million.

This improvement was due to a 31 percent increase in Calvin Klein royalty revenues, as well as increases in our dress shirt and sportswear businesses, particularly Calvin Klein, Izod and Arrow.

Retail comps for the quarter were minus 2 percent.

EBIT for the quarter increased 31% to $31 million.

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

From a business segment perspective Calvin Klein recorded a 43 percent increase in operating earnings due to revenue growth from existing and new licensees.

The 21% improvement in our apparel segment earnings was driven by increased revenues and higher gross margins due to more full price selling, particularly our Calvin Klein better men's sportswear business, which comes with a much higher gross margin than our moderate price business.

In addition, margin improvement in our retail businesses, coupled with our of underperforming stores, enabled us to achieve overall earnings growth in our retail operation.

Net income increased 54 percent to $14.8 million from $9.6 million last year.

Earnings per share in the fourth quarter doubled to $0.28, which was $0.12 ahead of both our previous earnings guidance and consensus estimates.

Looking at the balance sheet, our inventories are very clean and are up only 11 percent over the prior year, even though we are planning a first quarter revenue increase of approximately 22 percent.

Receivables, despite a 16 percent increase in fourth quarter revenues, are actually down 3 percent.

This is due to a significant reduction in mark-down allowance chargebacks from our retail customers and also excellent collection.

In 2004 free cash flow, before the $71 million acquisition of Arrow, was $62 million.

We are projecting free cash flow in 2005 to be between 65 and $75 million.

This amount is after estimated common and preferred dividends of $26 million and estimated capital spending of between 40 to $45 million.

Looking ahead, we are raising our 2005 earnings guidance to a range of $1.57 to $1.64, which represents a 15 to 20 percent increase over last year's earnings.

The earnings estimate does not include the impact of expensing stock options, as required under the new accounting rules, which will be implemented in the third quarter of this year.

Our preliminary estimate is that the partial year expense of stock options will be about $0.04 per share.

This amount will need to be deducted from all of your 25 earnings projections.

From a quarterly earning perspective, the seasonality of our business will be impacted by the growth of our Calvin Klein and Arrow royalty streams.

Our earnings in the first half of the year, particularly in the first quarter, will be positively impacted, as these businesses grow, while second half of the year earnings will be reduced by higher levels of fall and holiday marketing spending.

In 2005, this shift in earnings will be further impacted by the annualization of our Calvin Klein men's sportswear business and sales under our four new dress shirt licenses.

As such, we are projecting first quarter revenues to be between 460 and $465 million, or an increase of 22 to 23 percent over 2004 levels.

Earnings per share for the first quarter we are projecting in a range of $0.40 to $0.43, which is dramatically ahead of last year's first quarter earnings of $0.18 per share.

As we look out beyond fiscal 2005, we continue to be comfortable that the strategies that we have implement will provide us with long-term earnings growth of between 15 to 20 percent per year.

With that, we would like to now open it up for any questions.

Amber, if you can take the calls.

[Caller Instructions].

Elizabeth McGowan [ph] from SG Cowan.

Hi, guys.

Congratulations on a real good quarter and year.

I have, I guess, two questions.

The first is, can you give a little bit of color on kind of what's-- what your outlook is in terms of CK royalty income over the next year?

I understand it's the better-priced footwear line, but what may be driving growth among the other licensees?

And then, my second question is on the operating margin margin expansion opportunity longer term.

Are we still looking for 100, 150 basis points of operating margin expansion a year, given that you kind of exceeded that in '04?

I will try to deal with some of the questions.

From an -- let me deal with the last part first.

From an operating margin improvement, we are looking for operating margins to improve between 50 to 70 basis points.

That will be driven predominantly by gross margin improvement, as we go forward.

So that's the range we are targeting right now, after such a strong performance this year.

In the Calvin Klein royalty area, we are seeing significant amount of growth being driven by our --ur existing licensees.

Their businesses continue to be stronger as we move forward.

The women's business, the new licensees for women's better sportswear continues to grow as well.

That's providing a significant amount of growth, and we are looking for that revenue growth to grow in the double-digit range somewhere between 10 to 12 percent.

Okay, and back to operating margins just briefly, should we still be assuming gross margin expansion of, say, 100, with an offset from the investments now not only in CK but also in Arrow?

No, I think with the type of revenue growth we are expecting both in the royalties and on our sales line, we are expecting SG&A expenses to remain relatively flat as a percentage of sales.

So we are really looking for a 50 to 70 basis point improvement in our overall gross margins.

Okay.

That's really helpful, thanks.

And we will now take a question from Brian Wayne with Buckingham Research.

Good morning, guys.

I would just like to add my congratulations also, and also from Lee, who unfortunately can't be on the call.

First question I have, I guess, is regarding the Arrow brand.

I guess if you just talk about, like the growth opportunity there and just what additional licensees you see coming on board?

The growth in the Arrow brand is largely going to come from its reemergence with an apparel company, as opposed to a financial owner.

We were quite surprised with the strength of the brand in Europe on BENELUX and we were surprised by the strength of the brand in France, the opportunities expressed by licensees in Asia, and the strong consumer reaction to our own dress shirt and sportswear business in the U.S.

We are going to be investing, as Mannie mentioned earlier, significant in marketing in the second half of the year.

You will start to see advertising in "GQ" and other periodicals.

We think that that's where the growth will come from -- existing businesses.

All right.

Then also just a follow up with the outlet store business.

Are you guys at the at the right number of stores now?

You had a bunch of closings, I know, in 2004.

Are you guys at the right number now?

We are close as to the right number now.

We will continue to be contracting in some of the weaker outlet centers.

We already recognized that and dealt with that, financially, in the past, and those assets are already written off.

If they were positive cash contributors , we didn't rush to get out of them and pay the landlord.

So, we will be exiting them by attrition, and maybe another 25 or 30 or so stores, but it will be invisible to you guys.

All right.

Thanks a lot.

Good luck.

And we'll now hear from Dennis Rosenberg [ph] with DSR Consulting.

Good morning and, Bruce, congratulations on your retirement.

From three months of experience, I can tell you it's a wonderful thing.

Thanks, Dennis.

What are you doing on the call?

I'm managing my own money and doing a little bit of consulting.

Okay.

Could you elaborate on your expectations on the quarterly numbers?

The projected first quarter increases would represent virtually all of the full year growth, and you are talking about an improvement in the second quarter, also.

So if we look at the third and fourth quarters versus '04, what is different that causes those expenses to be so much higher?

Dennis it's really a fourth quarter issue.

The third quarter will also have growth in it, not to the level that we are seeing the first half of the year where we are expecting to see earnings growth.

There's a significant ramp up overall in our marketing expenditure, both for Calvin Klein and for Arrow, in particular, and our base business we're looking to expand.

And we are investing that significantly in the holiday, the fall holiday marketing season.

And so we are getting a significant amount of revenue growth coming in the first half of the year as planned, and that growth will continue in the second half.

But we are really spending the total amount of our advertising increase for the year, we are really spending predominantly that in the third, but even more significantly into the fourth quarter.

Dennis, let me add a little color to that.

You know, this has been a remarkable year.

And those of you that follow it know we are still in the apparel industry.

And stuff happens.

We are very proud of our ability to-- if we surprised in any way, it's on the upside.

But we are quite pleased with our ability to object, and we are not willing to say to anybody that we are going to be able to replicate in all regards the extraordinary performance in the second half of the year that we just concluded.

And there is some of that factored in there.

It just wouldn't be prudent for us to do that.

Thank you.

[Caller Instructions].

We'll now hear from Robert Drbul with Lehman Brothers.

Hi, good morning.

Congratulations, Bruce, and congratulations on a great year.

Good luck with everything.

A couple of questions on, Mannie, for the gross margin performance that you guys delivered this quarter, can you talk a little bit about some of the experiences that you had with some of the close-out sales that you were doing within the outlets and how that really tracked versus expectations?

How much of the upside came from better than expected clearance?

Well, I think it wasn't so much -- let me take a step back.

We had planned that we would have reduced gross margin in that one component of our business, which was the clearance of inventory.

And in fact, we didn't see depressed margins.

Traffic was very strong in outlet centers, and with our promotional calendar, we were able to do a significant amount of clearance in early December before Christmas.

So we didn't use as much promotional mark-down as we had anticipated.

With that said, those margins in those clearance stores were still below our overall chain average, but it was better than we had expected.

And overall, every one of our divisions experienced gross margin improvements across the board, driven by just more full-price selling, and in the wholesale side of the business we clearly had great sell-throughs at department stores and in the mid-channel, and significantly less need for mark-down allowance money.

So those thing all worked very well for us, and that's what drove the significant portion of the improvement.

Great.

A couple questions on Calvin Klein.

I don't know if you touched on this extensively, but the advertising number that all of your-- and the licensees as well, spent in '04 and the expectation for the marketing budget, can you quantify that a little bit for us?

the amount of spending on Calvin Klein is over $200 million in '04 and will probably be up somewhere in the 5 to 8 percent in '05.

Just to remind everybody, some of that-- a lot of that flows through our income statement, as we manage that, and some of that is done by the licensees.

But we control all of the creative and all of the advertising for it.

But the total spend will be up somewhere around 5 percent.

Okay, and just one final question, Mannie.

In the -- when you finish with the over 100 million, 124 million of cash on the balance sheet, can you talk about your priorities over the next 12 months and over the next few years with this cash and how you are looking at it from that standpoint?

This is Bruce.

I'm going to protect Mark from answering that question right now because I think he deserves sometimes to get settled in [inaudible] and I think it's probably more appropriate.

As I said in my opening comments, Bob, I think this is a consolidating industry.

We've got some serious capacity in our infrastructure to handle more, and I think Mark -- I don't want to put words in his mouth -- will be evaluating that strong cash flow and strong cash position that we have as a company, as we move forward and what's most appropriate to do with it.

Mark, you want to add anything?

I will let you protect me.

All right.

Thank you.

We will now hear from Jennifer Black with Jennifer Black and Associates.

Let me add my congratulations to everyone.

Great job.

I wondered if, Mannie, you could talk, or Bruce you could talk a little bit, about any opportunities within the outlet business, whether it be Calvin Klein or any of your other brands, or -- I think comps don't make too much of a difference when you are as profitable as you are.

Can you speak a little bit more about the outlet business?

You know, Jennifer, I'll answer it.

We spent a good deal of time and gone through a good deal of pain contracting our outlet business because it became much too large a component of our business, and in fact was a driver.

It no longer is.

We think there's a number of good outlet malls that will continue, and we will participate in those malls.

We have said, and are, opening a limited number of Calvin stores in the very high-end malls.

The team has done a wonderful job in that regard in the year that just ended.

That will be a small chain in the premiere stores adjacent to premiere brands in the country.

And we will continue to work to move the profitability of the stores located in these good malls.

But we've got it now where it's a nice complement to our business, a good vehicle to liquidate inventory, so we are at the mercy of jobbers, et cetera. nd I think that that's the way we would like to leave it.

It's not a future driver to your Company.

I am on my way to Capizon [ph] today.

I know it's got to be a good mall for you.

Anyway, I don't think I have any other questions.

Great job.

Thank you.

We will now hear from Tim Guyer [ph] with Piper Jaffray.

Congratulations on a terrific quarter.

A couple of questions for you.

First of all, in the Calvin Klein women's business, recently there was an expansion into more of a casual sportswear line.

I was wondering how that's trending?

Also on the men's Calvin Klein business, how is that performing with respect to fall bookings versus last year?

And are there any categories within Calvin Klein that are standing out?

With reference to your first question on women's, you are correct, there is an event afoot of launching more casual sportswear than from the original launch of the business approach for business dressing.

Both of those are in a number of stores.

In some stores casual is the sole offering of Calvin Klein.

It's early in the season, but what we see is a much better mix, a much better inventory control from our partners.

And we feel much better about the performance to date in the spring than we had last year at this time.

Having said that, we also must remember that having a year under our belt, our partners and ourselves are a lot smarter in terms of how we position the brand and what is available to us.

So we feel pretty good about the women's collection.

As far as the men's collection is concerned, Bruce said earlier, all the new entrants in the better zone in men's, we were the stellar performing.

We still are doing well.

We feel very strongly about our positioning in the men's business.

We continue to grow stores and grow doors in those that make sense to do it.

The categories in particular in the men's business that are doing well are woven shirts and pants.

We are doing extremely well there, and as you look forward in Calvin Klein, some of the new licenses that are starting to launch better shoes for fall, there will be women's accessories at the better price point that we think will be extraordinary.

And from what we can see, all the new entries into Calvin Klein are going to fulfill what we hope that they would do.

Great.

With respect to your Izod business, what is your current door count and does that compare to last year?

And also, what categories are you seeing strengthen in in that business?

Izod is a great story for our company.

As you know, we bought a brand out of bankruptcy in 1995, and since that time we seem to have done a lot of right things for the brands, including heavying up on the advertising and marketing of the brand.

There's no month that goes by, or no week that goes by where you won't see Izod being advertised somewhere across the United States.

Having said that, we've been in approximately 1,800 to 2,000 doors.

We are not looking to expand doors.

We are looking to expand within the stores that we are currently doing business.

And that's happening, we are proud to say, very successfully.

With the launch of jeans, the launch of Izod Red Label, which is luxury product, sweaters, and outerwear, the brand is performing very well.

The combination of the right product at the right time with an increase in expenditure in advertising coming from our larger business and our larger licensing network, including women's I should say, things are going well in the Izod brand.

I should point out, I spoke to the president of the Izod women's division this morning.

I had just reviewed their sales to date for the season and they are doing, as well, far president this spring than they did last spring and the consumer is voting for Izod.

So we feel very good about it.

Okay.

Last question, I was just wondering what type of drag did the underperforming outlet stores have on on your on up margin last year?

You said last year, you mean 2004 or 2003?

2004.

Okay.

Those stores, although they were at lower margins, still were net profitable on a relatively low level.

So the store, at the store level none of those stores were losing money.

That's one of the things we talked about.

As much as the we had underperforming stores that were trending negatively, because of the expense base in the outlet environment, those stores are not money losers.

So what we'll be able to do is redeploy our working capital into much more efficient, much more high-margin businesses, but there weren't any loss opportunities just by closing stores.

Thanks a lot and great job.

Our next question will come from Carla Casella [ph] with JP Morgan.

Can you hear me all right?

Yes.

Okay.

Great.

I'm wondering what your thoughts are in terms of acquisitions.

Where would you like to fill in, if you did have acquisition opportunities, or are you not even looking?

One, I said before, I am going to protect Mark in this regard.

He and Mannie are going to drive this, as we move forward, as we said relative to the transition.

Two, he said and I said before, we have a discipline that we like to stick to, which says we are not too concerned if the infrastructure has a problem because we would lever anything we acquired into our infrastructure.

What we don't want to do is by any weak brands that need to be fixed, because we don't think that the marketplace lends itself to fixing brands.

So, said backwards, we would be looking for strong brands that can be bolted on to our company's infrastructure.

Okay.

But no specific focus?

No specific focus.

Okay, thank you.

[Caller Instructions].

We will now hear from Adam Abrams [ph] of Lehman Brothers.

Good morning.

Amber?

Mr. Klatsky?

Yes.

Okay.

Hi.

Good morning.

Who is this?

Adam Abram

Hi. was wondering if you could give updated door counts for the Calvin Klein sportswear line in both men's and women's?

The women's line is about 220 stores for spring and will go to approximately 250 stores for fall.

And that will be a combination of casual and business casual for women's, as well as some stores only casual.

In men's, we are approximately 300 -- 250 to 300 doors, and, again, it's about growing the business within those stores.

Okay thank you.

And then also perhaps updated market share in the dress shirts and sportswear categories?

We saw growth in our market share in sportswear, both in the mid-channel and in the department store channel.

Both are up about 150 basis points each for us. and we are going to be presenting at an investor conference this afternoon., we'll update some of thos numbers.

And our dress shirt market share of about 45 percent is consistent at that level in department stores.

So we maintained our market share in department stores.

Okay.

Thank you.

And there are no further questions.

Sorry, Amber, no further questions?

No further questions.

Thank you all very much.

We look forward to speaking to you the latter part of May with the results of our first quarter.

That concludes today's conference.

Thank you for your participation.

Have a great day.