PVH Corp (PVH) 2005 Q1 法說會逐字稿

Good day, everyone, welcome to today's Phillips-Van Heusen Corporation's first-quarter 2005 earnings release 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 materials.

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

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

The information made available on this Webcast and conference call contain certain forward-looking statements, which reflect P.V.H.'s view of future events and financial performance as of May 25, 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 - - 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 forward-looking statements, including without limitation our estimates 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 Website and the Company's current reports on form 8-K furnished to the SEC.

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

Please go ahead, sir.

Good morning.

Thank you all very much for joining us.

I am joined here in our conference room on Madison Avenue with Mark Weber, Manny Chirico and Pam Hootkin.

It's a pleasure to be with us.

We are, as noted in our release, extremely pleased with the performance of the first quarter.

It's quite apparent to us that the momentum that began building with the successful integration of Calvin Klein and the various strategies in place in our legacy businesses have continued into this year.

What's particularly pleasing is our legacy business.

Let me begin with our dress shirt business where our core brands and historic brands, Van Heusen and Geoffrey Beene, et cetera, continue to outperform the environment.

And it is a strong environment for us this dress shirts.

Our launches of BCBG, Chaps, Sean John and Michael Kors are all performing as well and we are quite thrilled with the performance of that division in the first quarter and as we look out for the year.

And I will comment on that in a moment.

Our sportswear businesses, what we have categorized as a growth engine of our Company, continues to fulfill that promise and exceed our expectations.

The Calvin Klein better sportswear business, which we are handling inhouse, the men's business is performing quite well.

And we have shipped the first spring merchandise, which arrived in the latter part of last year in the first quarter of this year, and as I said is performing quite well.

Reinforcing the strength of our legacy businesses, in addition to our new Calvin Klein business, is the strong performance of IZOD.

It is clearly a leader on the main floor of department stores in the United States and brand extensions are also working quite well.

Arrow also continues to exceed our expectations in the mid channel and performs in a stellar, stellar fashion.

Our retail business, which those of how have been following us know, has been rationed in size and is an important complement now to our business as opposed to a driver.

Is also in total meeting its plan for us and performing well.

We feel good about that.

So the three core historical components of our business, all are working.

And, again, I say, I can't remember when all pistons have consistently worked together in such a strong fashion.

The newest member to our Corporation, Calvin Klein Licensing Group is doing exceedingly well.

Under historic licensees that we worked with initially on integration continued to perform well and continued to look to be in a second year of growth for us.

We are quite pleased with some new initiatives.

We began shipping footwear and will ship accessories in the second half of the year.

And are quite excited about that.

We are thrilled with the agreement, which we announced in the past couple of days, with Fertini(ph) or a division of Fertini (ph), our licensee in Europe, for bridge sportswear and accessories.

And think this will play a major role in our continued growth of the Calvin Klein brand that the consumers use around the world.

This will be a large range of sportswear products in Europe and the Mideast that will be accompanied over the next five years with the opening of at least 50 retail shops and we are quite thrilled with that.

We commented in our release that we are thrilled with the earnings in the first quarter, and have taken up our second quarter somewhat.

We have chosen be conservative about the second half of the year, holding our number where it was when we last spoke.

We fully expect that if the trend of business, as we see it now continues, we will exceed those expectations and that guidance.

But we don't want to call that out right now.

We believe there are too many uncertainties in the environment.

We don't know what the gasoline price issue is going to do in terms of consumer reaction.

But our businesses continue to outperform even a good environment.

Our inventories are in line and we are poised to beat the second half.

But is - - again, as I am saying, we just think we would consistently like to exceed your expectations.

And therefore think a conservative approach to the second half of the year is most appropriate.

Finally, and quite importantly, just a word on the transition from myself to Mark and of course Manny in fulfilling Mark's old role is going quite well.

As we said, it's really a nonevent.

I feel quite good about that.

Given the proximity of that official transition, which will occur on June 14, I think it is most appropriate that Mark will field most of the nonfinancial questions that you might have.

With that, I will turn it over to Manny.

Thanks, Bruce.

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

Talking about revenues, our revenues grew 25% in the quarter to $414 million.

The improvement was due to significant growth in our dress shirt and sportswear businesses, particularly Calvin Klein, IZOD, and Arrow.

The dress shirt growth was also fueled by our four new dress shirt lines, Chaps, BCBG, Michael Kors and Sean John.

In sportswear, the initial spring shipments of Calvin Klein men's sportswear, as well as the rollout of a limited number of Calvin Klein outlet stores, contributed to the growth.

Overall in the quarter, our retail comps were up plus 4%.

EBIT for the quarter increased 86% to just over $47 million.

And our EBIT margin improved 330 basis points in the quarter to 10.1%.

The increase was driven by the strong sales growth in our wholesale businesses and the leveraging of operating expense.

Focusing in on gross margin.

Gross margin was up in all of our major businesses.

However, given the significant sales increases in our wholesale business, consolidated gross margin is down slightly, due to the change in our sales mix between wholesale, retail and licensing revenues.

Focusing on earnings per share.

In the quarter they increased about 150% to $0.46 a share, which was $0.03 ahead of the consensus estimates and also $0.03 ahead of the top end of our previous guidance.

From a balance sheet perspective, our inventories are very clean and right on plan.

The 21% increase in inventory is to support the Calvin Klein volume increases associated with the new businesses.

And also to support the planned growth in our dress shirt and sportswear businesses for the second quarter.

We had also planned an acceleration in our inventory intake, particularly from China in response to the uncertainty in the global sourcing situation in the industry.

Looking out to the balance of the year, given our strong performance in the first quarter, and the strong trend of our business, we are projecting second-quarter earnings per share to be in a range of $0.38 to $0.39 per share which represents a 36% to 39% increase over last year.

Revenues in the quarter we are projecting at $420 million to $425 million, for an increase of about 12% to 13% over the prior year.

For the year, after reflecting the actual results of the first quarter and our revised second-quarter projections, we are raising our 2005 earnings per share guidance to range of $1.68 to $1.73.

Which represents an increase of 23% to 26% over last year.

We are looking at revenues to be slightly over $1.8 billion for the year or an increase of about 10% to 11% over 2004.

Bruce spoke about our projections for the second half of the year.

We are really continuing to keep a conservative posture and have not raised our earnings estimates for the third and fourth quarter.

However, if the current trends in business were to continue, we would expect to exceed the estimates for the second half of the year.

Finally, as we look out beyond 2005, we continue to be comfortable with the strategies we have in place will allow us to continue to grow our earnings at a rate of at least 15% to 20% a year.

With that we'll open it up for any questions that you might have.

Thank you. [Operator Instructions] From Piper Jaffray we will hear from Tim Guyer.

Good morning and congratulations on another terrific quarter.

A couple of questions for you.

First of all, regarding options expensing.

Now that a lot of other companies are delaying their stock option expensing on their income statements.

I was wondering if you are going to adjust what you are doing going forward at all?

Our plan - - our - - the estimates that we have given prior to - - at the end of the fourth quarter did not include option expensing.

And our plan is to not expense options this fiscal year and we'll start in 2006 with a new FASB pronouncement.

Okay.

Also, do you expect to be impacted at all by the recently announced Chinese tariffs at all?

And what kind of impact could that possibly have?

We don't expect to be impacted by those tariffs.

Our sourcing and all our importation of merchandise includes China as a potential and a partner - - as a part of our total sourcing, and we have already adjusted a significant portion of our sourcing around the world outside of China and other countries.

While China is important, it will not have an impact.

Okay.

What percentage of your sourcing comes from China right now?

Somewhere in the vicinity of 20, maybe as much as 25% depending on the category.

All right.

And then lastly, relating - - related to your Calvin Klein business, could you tell me if there is any specific categories that are outperforming and also if there are any categories where you kind of see some opportunity remaining?

In terms of Calvin Klein, the bulk of our licensee businesses are performing better than plan or on plan.

We feel very, very good about what we see happening between the licensees that existed and new licensees coming on stream.

Most of the initiatives that we talk to you about as we bought the Company are starting to take root now with the start-up of some categories as we mentioned, footwear, accessories in the second half of this year.

But by and large, we feel good about what has happened with our licensees that existed and our new licensees all are showing us a good signal that the business is well-positioned.

And the fact that Calvin Klein is now appearing in other areas of retail stores that heretofore didn't have Calvin Klein helping to fuel the business on two levels.

One, the brand is being distributed throughout the store.

And, two, the revenues that we collect for advertising has - - is helping us expand the presence of Calvin Klein in the media.

And we all think this is going to continue to bring us good results.

Okay.

Do you have any more information on the fragrance launch specifically?

Well you are may recall that it was announced last week into Unilever Cosmetics Company sold their cosmetics company of which Calvin Klein was 80% of to Coty.

Coty is one of the top ten best fragrance companies in the world, we're marketing fragrances and color here in the United States and around the world.

We are very excited about the fact that Coty has decided to purchase this business.

Because it will allow a company that is dedicated to fragrance and to color to focus in on this Calvin, which will be their largest asset and the jewel of their stable now.

Having said that, some of the new initiatives that have been taking place with Calvin Klein have created a significant increase for us in the back end of last year and projections this year look way ahead of plan in that category of business.

Once again, we feel good about that.

Okay.

What type of revenues do the fragrances usually generate after being launched?

Well, you'd have to ask them that.

Okay.

That's their business.

We can only tell that you reflected in these numbers are some increases associated with first, Unilever increasing their projections for this year and we feel very good about having them the ability to achieve those numbers.

All right.

Thanks a lot

From Buckingham Research we will hear from Lee Backus.

First Bruce, we're certainly going to miss you on these calls.

Somehow, you leaving is far from a nonevent but you're certainly leaving a strong Company and a strong management team behind you

Thank you, Lee.

First on Calvin Klein, imbedded in those estimates, what kind of growth for the rest the year is in licensing?

And as far as the expense structure for your Calvin Klein design studio, how much additional overhead do you think would you need there?

What kind of flow through are you getting on the licenses - - on the licensing income?

Or the increase in licensing income?

I understand.

Hi, Lee, it is Manny.

We are looking for somewhere in the range of Calvin Klein revenues to grow the balance of year about 10%.

And we would expect - - although - - the expense won't be associated with the design studio, but we are - - we continue to invest in marketing in the brand and some of that is contributed by licensees.

But we also are stepping up our end.

So we would expect to see a reasonable flow through.

The Calvin Klein licensing business operates at a 35% operating income margin for the segment.

And we would expect that the flow through would be closer to 50% on the incremental income that we add.

Would you expect next year's Calvin Klein licensing revenue to grow at the same pace?

Yes, because a lot of the initiatives we have been talking about, the bridge, the apparel, accessories and the footwear really does not kick in a significant way until next year.

We are really still in the start-up phase right now.

Can you also discuss, Mark or Manny, the Brown Shoe deal that will be done Bass and how it is impacting you and especially your outlet stores, your Bass outlet stores?

Brown Shoe has had the brand for less than a year.

They are working on marketing the brand through advertising the balance of this year.

I am sure that in the course of acquiring another company, even with their expertise, they've had some bumps and grinds over the course of the year in integrating it into their company.

Having said that, the market is right for traditional apparel and footwear and the Weejun product in particular appears to be doing pretty well.

As it relates to us, we were allowing - - we got out of the shoe manufacturing business by licensing this to Brown Shoe, which has been one of the components that has allowed our business to focus on apparel and designer and not on shoes.

And the expense associated with that has been eliminated.

In terms of getting shoes and acquiring shoes for our outlet stores, there's no change.

It is relatively simple.

We are buyers of shoes in the marketplace from people who are expert in shoe design and shoe manufacturing and sourcing.

And we go in as buyers and select items and put the Bass label on them where applicable.

So, all said and done for us it's been a very good experience.

And I think Brown Shoe would be better positioned to explain to you how they are doing with the brand.

Okay, thank you.

From SG Cowen we will hear from Elizabeth Montgomery.

Hi, guys.

Congratulations.

Thank you.

I have a couple of questions.

I guess the first one, can you talk a little bit about the Calvin Klein men's line and its expansion?

Whether or not you are still on track for, I believe you had said 350 doors for fall this year?

Yes.

By in large we are.

We are doing two things, expanding our door counts to some other doors and other retailers.

And at the same time, the shop size and the productivity within the Calvin Klein business is being addressed because we are exceeding plans and we think we can do more business per store.

So, it's a combination of both those things, new doors and more activity in given doors.

Do you have any idea who you might be taking share from in that category?

Share from?

Well, the stores are big stores.

They have the ability to sell a lot of product.

Calvin Klein is one of the two, arguably three, most recognizable designers in America, and, therefore, has a rightful share.

And why we bought the Company is there was so many categories, like men's and women's apparel that didn't exist with Calvin Klein and sportswear other than jeans and underwear.

So, there is an appetite for the brand.

Having said that, there are a number of people who had new launches in the better area that have not been successful.

And there are a number people in traditional areas who had - - heretofore had very large shops that have been pared down and Calvin is benefiting from the weakness in some of those other markets.

We just focus on what we do well.

We believe the brand has a right to be in those channels.

We believe that as we add categories to the men's business and the women's business, whether it be footwear or coats or accessories, that again, it is going to make this brained even stronger.

Okay.

Great.

In terms of the dress shirt business, can you maybe talk about sell through levels there versus the sell-in labels - - the sell-in levels from launching some of these new labels in the past two quarters?

And any idea how inventory in the department stores and dress shirts are tracking right is now?

We are pleasantly surprised.

That although we had a record year in dress shirts in 2004, we planned single-digit increases for the business going into the beginning of the year and are exceeding those plans as we speak.

The environment in dress shirts is extremely strong.

People are buying woven shirts whether they are, in this case packaged woven shirts in stripes and in colors and all categories from the brands that we own, which are significant in the channel distribution in which we operate.

Whether it be the mid-tier department stores, JC Penney or department stores in general, the category is very, very strong.

We are outperforming the stores who are doing very well.

We are outperforming our competition.

And continue to garner share of market in a very robust category right now.

Incidentally, neckwear is doing very well.

Just on an inventory level portion of that question.

Inventories are very lean at department stores particularly with our brands and we see a significant increase in our turn ratios at the store.

And we stay very close to that, because that's where we can get into trouble with markdown allowance money.

So we are very happy the way inventory is particularly in the pipeline as it relates to dress shirts.

Okay.

Great.

And then just two quick questions.

Can you tell us what the outlet comps were in the year-ago period for Q1 and what your comp expectation is for Q2?

I think they were down 4% in Q2 last year.

And then the CK licensing revenue being up 10% in '05.

That was actually a little bit lighter than I was looking for.

Was I just kind of too far ahead?

Or is that maybe come in a little bit relative to your initial expectations?

I think you said that it hadn't.

Okay.

Let me take them in pieces.

Last year's first quarter was approximately plus 4.5% comp store increase last year.

The second quarter I believe was - - I don't have it in front of me, but I believe that you are correct, it was down about minus4.

That's what we had said on the conference call last time.

For the balance year we are projecting at plus 1% overall for the next - - for the last nine months of this year.

Okay.

So the trends are better than that but that's where the plan is right now.

The Calvin business, that plus 10%, I think I kind of gave a little bit of off-the-cuff.

We have been projecting from the beginning of the year 10% to 12%.

I think - - there is no change to that guidance at this point and we are very comfortable with that guidance right now.

Okay, great.

Thank you.

Up next we will hear from Noelle Grainger from J.P. Morgan.

Hi, Noelle.

Congrats to the whole team continue on their new responsibilities, first of all, and much luck.

I have a couple of questions.

First, Manny, can you break out for us on the inventories how much of of the increase is coming from what you maybe accelerated due to some of the sourcing dynamics at the moment?

About $10 million we have accelerated.

Okay.

And the rest is really just to drive the sales growth in the - - in dress shirts and sportswear.

Okay.

Great.

That's helpful.

And then also, Manny, for you in terms of margins, two questions.

One, you gave us some good insight into the nuances of the margins in the quarter.

I think for the year, you were planning margins to be up despite the mix shift in the 50 basis point range or so.

Is that - - are you kind of reasessing the composition of how the margins may flow for the year?

Just slightly and it's all driven by mix.

We have been surprised by the wholesale sales growth that we have seen as large as it's been.

And if that trend continues, and wholesale continues to accelerate, it will put some down pressure on consolidated margins.

But that's just a mix this year, because our overall margins are up.

And when you - - and the benefit you will see is a significant leveraging on the SG&A line and improvement overall in operating income margins.

So it is all very positive.

So right now, I would say - - we talked about 50.

Right now I would say we are closer to 30 to 50 basis point improvement with a similar improvement in SG&A leverage.

And we should be 80 to 100 basis points up in overall EBIT margins for the year.

Okay.

Great.

The - - it seems like as it relates to the first quarter, you did better in terms of the expense leveraging side.

That was really a strong number, particularly as you look at the apparel and footwear segments in terms of your operating income.

Was there anything going on in the first quarter?

Obviously the comparison to GAAP is a factor.

But is there anything from a fundamental business perspective that wouldn't continue as we look forward?

Well, the only point I would make is our sales growth was more than we expected.

So as you layer in that - - layer in those sales, most - - a lot of our expenses are fixed and not variable so you do get more leverage than was initially projected in the quarter.

And the second point I'd make is as we said in our fourth-quarter press release, we're - - in the second half of the year, we are stepping up our advertising commitment and our overall marketing spend.

So that will - - we won't get a significant leverage in the third and fourth quarter than we did here.

But overall, we would expect to get good leverage on the operating expense line.

Okay.

Great.

And then just maybe a big picture question for Mark in terms of - - can you elaborate a little bit in terms of the retail environment overall?

And as you look out to the second half, maybe some of the challenges that you see aside from the gas prices, which you mentioned?

And perhaps specifically the - - any potential impact from consolidation at retail?

Okay.

First of all, I would start by telling you that when we look at retailers, we count very heavily on their ability to run their stores.

That's not our job.

There is a lot of uncertainty in the retail environment in terms of mergers, acquisitions and companies up for sale.

And that's creating discomfort for the number the employees affected by these.

And for those who don't understand where they sit or other companies that are up - - that are announced that are up for sale, I can only imagine what they are living through.

And whether or not their eye is on the ball or not remains to be seen.

And as I say, that's their job to manage through.

What we can manage is the way we are distributing our brands, the way we are designing our products and the way we are advertising and marketing them.

And we are very, very confident right now in those capacities.

We are funding more and more of the national brand requirements to make our brands well known.

The expenditures that we have deployed on Van Heusen are record numbers for us.

IZOD continues to grow through the initiatives that we have put in place, as well as our licensing partners.

And incidentally, this weekend, we are co-sponsoring an Indy 500 car with Red Bull on Ed Cheever, who is one of the past Indy 500 winner and hopefully you will see our car over the course of this weekend.

So initiatives such as that, when we acquired the Arrow Company, we shared with all of you that we were going to start marketing that brand.

And a significant expenditure is starting to ramp up here and around the world on the Arrow brand between now and the end of the year.

And of course in Calvin Klein, the other mainstay, those advertising expenditures to continue to grow dramatically.

So, what we have done is we have got some very strong brands positioned with very good retailers at fair price points that people will respond to.

We are now advertising and marketing those brands and levels that we heretofore never had the opportunity to do, in quality retailers that have to bring customers in.

Now, the men's business in general appears to be a lot better right now than the women's business.

And the only place of softness that we are seeing, whether it be men's and to a greater degree women's, is in seasonal products, as you can well imagine with the weather as we are seeing.

Products such as shorts, sleeveless women blouses, open-sandal shoes are not meeting plan.

But that aside, we are outperforming the competition in almost every category.

And if retailers do what they need to do to be viable as we go into the third and fourth quarter, we see the big picture pretty.

Well we will keep our fingers crossed for them, right?

Thanks so much.

Up next from DE Research we will hear from Melissa Otto.

Good morning, congratulations on a great quarter yet once again.

Thank you.

Just two really quick questions.

I think, one, I would like to just get sort of an update on the performance of Calvin Klein internationally, specifically in Europe.

How is the brand performing there, if you can give some color around that?

That would be great.

Well, Calvin Klein in Europe to date, there is a collection business, which is relatively small in some of the best stores throughout Europe.

And there has been an initiative to open more collection stores.

One was opened recently in Rome.

And in June when we are there for the men's shows in Milan, there will be a Calvin Klein collection flagship opened in Milan as well.

So, on a relatively small base, we feel pretty good about what is happening with the European partners in the collection business.

The big business, if you will, in Europe, is in jeans and underwear, and Fertini(ph), who was mentioned earlier has done a very good job of attempting to roll out and maximize those businesses through either freestanding stores or independent stores with their partners.

They feel so strong about their current performance throughout Europe that they have agreed and have fought hard to achieve a CK license for men's and women's sportswear.

And that is the best signal of what we think Calvin Klein will be.

Whether we open freestanding CK sportswear stores or combo stores that will include CK jeans and underwear remains to be seen.

But we are very, very confident that with this initiative and of course the royalties we will earn and even more importantly because it will get us larger income; is the expenditure on advertising that they have agreed to put forth will only continue to make the brand stronger.

That's where we are.

Could you give us some metrics around the jeans business.

What sort of growth expectations you have around it?

I think that question is - - this is Mr. Weber talking here, that question is better aimed to Warnaco.

I can tell you that the men's business has been good.

The women's business has been better and their introduction of choice has been very, very strong and very well received from retailers and we feel good about the results and the go-forward picture both here and through our licensees Fertini(ph) for the rest of the world.

Okay.

And then I just wanted to - - there was a question earlier about just basically what was fueling the margin expansion in the apparel business.

And I just wanted to kind of follow-up with a question within that.

And I was wondering to what extent sourcing may have come into play in terms of that.

Or is it just simply mix there?

I think the sourcing was a very small piece in the quarter, particularly because if there are going to be benefits associated with the elimination of quarter, that will happen more so in the second half the year as we work through inventories.

So from a sourcing point of view, it was relatively limited.

It was really driven by just getting better prices and also price selling.

Great.

Thank you very much.

You are welcome.

Up next we will hear from Carla Casella with J.P. Morgan.

most of my questions have been answered but did you give your Cap Ex number for the quarter?

Yes.

The Cap Ex number was $7 million round numbers.

I think it was $6.7 million for the quarter and depreciation and amortization was $8.5 million.

Okay.

And what is your view in terms of acquisitions?

Are there any holes to your business that you think you actually need to fill in?

Or are you - - do you keep your eyes open for any acquisition opportunities?

I will respond the way you asked the question.

Generally in our Company there are things that would be nice to do, things that you should do and things that perhaps you have to do.

I would say to you we don't have to do anything right now because of our legacy businesses' performance and the growth that we see with Calvin Klein.

Are there things we should be looking at?

Are there opportunities whether in men's or women's?

The answer is, yes.

And we are going to continue as we always have to aggressively look at opportunities as they become available.

Okay.

Great.

Thanks.

From DSR Consulting we will hear from Dennis Rosenberg.

Good morning an let me add my congratulations.

Thank you.

Could you talk about or give us some expectations on a segment basis for the second quarter and for the full year in getting to your EPS guidance?

Sure - - yes, Dennis I will try to give you some insight.

I guess from a segment point of view, we'd be looking for revenue growth in the licensing portion of the business.

As I said before, somewhere between 10% to 12%.

And we'd be looking at sales growth in the apparel segment somewhere between 13% and 15% as we continue benefit from the rollout of some of our businesses.

And we would expect in both businesses that our operating income - - both segments that our operating income margins will improve.

The apparel segment should improve by over 100 basis points driven by slightly higher margins and the continued leveraging of operating expenses.

In the Calvin Klein, we would also expect to see some improvement as the flow-through of those earnings go to the bottom line.

So that's how we get to our $0.38 and $0.39 for the second quarter.

Okay.

And could you comment on how the Women's line is doing now?

The women's Calvin Klein line?

Yes.

Once again, I think our partners at Kelwood are better equipped to answer that question than we are.

However, I will tell that they got off to a rocky start with - - by projecting numbers way in excess of where we thought we would originally be.

And they've had to take some markdowns to get the inventories back in line.

This year there has been a focus added on casual women's sportswear at lower price points and the balance between casual and business casual is more in keeping where they think going forward the business ought to be.

As we stand for spring, sales are better than last year.

Sell-throughs have been better.

And we feel pretty confident of the balance of the year them hitting the estimates they gave us.

Which incidentally are on projection, which we got from them when we first launched the Company.

Okay.

Thank you.

From KDP Asset Management we'll hear from Clark Boske.

Thanks, my questions are answered.

Thank you.

Thank you.

From Goldman Sachs, we'll hear from Margaret Mager.

Hi.

First of all, I just want to say congratulations, Bruce.

And I guess this is your last earnings call.

So good luck in retirement.

I hope we'll see you around and you won't disappear completely.

Thank you, Margaret and I won't disappear completely.

Well, that's good. it's nice to end on a high note, so congratulations to you.

Thank you.

Manny, can I ask about the earn-out payments on Calvin Klein?

Last time I saw you I know I asked this, but I am not really clear on how that comes to pass in terms of cash flow, management and outlook and any impact financially, capital structure.

Just if you can help me understand what the numbers are, that would be most appreciated.

Sure.

It's a contingent purchase price payment that is paid out over a 15 year period.

We are in year 3 of the earnout.

The - - it is a percentage of sales of the worldwide wholesale sales of the Calvin Klein brand which - - and the rate that we have disclosed in the financials in the 1.15% of sales.

So it's just slightly above 1% of sales.

Last year, that earnout was $22 million.

We are projecting that with the growth in Calvin Klein business it will be closer to $25 million this year.

And it is always been paid out as of our cash operating fund.

And it is not any burden from a cash flow point of view.

We are projecting cash flow this year to be somewhere in the range of $80 million.

And that $80 million is net of the Calvin Klein payment, CapEx, and all of the end dividends as well.

So it's been factored in from the beginning.

We look at it as a way to fund the purchase price in Calvin.

As we said at the very beginning, Calvin wanted to have a position in the Company that we have had confidence in the growth that we were bringing to the Company.

And he wanted to share in that growth and put some of the purchase price at risk.

And this is the way he did it.

So it is not one big payment.

No, it is done on quarterly - - it's every quarter.

And it's over a 15-year time period?

That's correct.

Okay.

And it goes through SG&A?

How - - where does it - -?

It's purchase price, Margaret.

It doesn't go through the income statement at all.

It goes through the cash flow statement and it's an adjustment to good will on the purchase price of the business.

Okay.

That's very helpful.

Thanks, Manny and good job, everybody, and congrats again, Bruce.

You are very welcome.

Up next we will hear from Jennifer Black from Jennifer Black & Associates.

Good morning and let me add my congratulations as well.

I have known you guys for a long time.

Thank you.

Well, Bruce, since this is your last call, I am going to ask you a big picture question.

I wondered if you could update us on how big you think the Calvin Klein business could be over the next five years?

I know it is pure speculation, but both on the men's and women's side as far as apparel?

And then I have another question after that.

Well, when we bought the Company, retail sales were just under $3 billion.

I think we are all been pleasantly surprised that the brand is even stronger than we thought.

And I would guess, and you capture very well as you always do Jennifer of speculation, but I certainly think that the Klein business can be - - will generate $5 billion to $6 billion of global revenues over the course of the next five years or so.

And if you had to guess what portion do you think apparel would be?

I would guess, maybe half of the increase would be apparel.

Okay.

Great.

And good luck to you.

Thank you, Jennifer.

And then I wondered on IZOD if you had any new licenses or product extensions or if there's anything new there?

And then lastly, do you have any comments about the Trump launch?

In the case of IZOD, we continue to grow the bottoms business.

We started with jeans, twill business and khaki business is growing fairly well.

We signed a license about a year ago with a company to market our brand again in the golf specialty market including pro shops and resorts around the world.

The Company is run by a woman named Nancy Haley, who is considered one of the icons of the golf industry.

And she is currently one of the principals in a company called Tehama.

The launch of IZOD in that channel has been exciting.

I am familiar with a couple of very exclusive resorts like Boulders in Phoenix, Arizona, Scottsdale, Arizona where the IZOD is and including - - they are now starting to market within the Disney walls in their golf shops.

So, we are very pleased with the way that is going and rolling out.

So in addition to that, of course, the IZOD core businesses in knits and wovens and all the related products like sweaters and fleece have been exceedingly well and selling very, very well through spring.

The second part of the question?

Trump.

Donald Trump's line has been launched.

It started with clothing and now we are involved in shirts and ties and we will be launching a golf line.

The response to it and the sell-throughs have been excellent.

The retail community is very eager to embrace these lines.

It will never be a very big business but it will be incremental to us.

And we like very much being associated with Donald Trump, his organization and what he represents today in America to young people.

He is a hero and people are very responding in kind.

All right.

Well, thank you very much and good luck.

[OPERATOR INSTRUCTIONS] Looks like we will take a follow-up question from Tim Guyer from Piper Jaffray.

Yes, just one quick follow up question.

I noticed that tax rate in Q1 was 37%.

I was just wondering if you expect that to continue going forward for the remainder of the year?

Yes.

With the increased earnings, we have a higher marginal tax rate, and that's the reason for it.

And that should be the rate that we use for the balance of the year.

All right, thanks a lot.

From DSR Consulting we have a follow-up question from Dennis Rosenberg.

Manny, I was working with your numbers you gave me on the model, and I come up with a higher total number than the 1.8 to 1.82 billion, if I use 13% growth.

I assume those numbers you gave me were for the full year.

No those numbers were second quarter.

I thought that's what you asked.

Oh, okay.

Actually I asked for both.

What would you expect for the full year then?

I guess I would still be focusing on - - in the range of 10% to 12% for licensing.

But we anniversary - - we launched Calvin Klein men's in the third quarter of last year at the beginning And so we won't have - - we will be anniversarying that.

So we won't have the growth layered on as far as that.

And also the new dress shirt lines that we built in are also going to be factored in at that point.

So the second half of the year, I think we go back to a more normal kind of growth rate on the top line for sales of somewhere around 4% to 5%.

Okay.

And what about the EBIT for the full year?

For the full year, we would expect to see an overall improvement in our EBIT of somewhere between 80 and 100 basis points.

And I think it will come both from margin and SG&A leverage.

Okay.

Thank you.

You are welcome.

At this time, gentlemen, there appear to be no further questions.

Mr. Klatsky, I'll turn the conference back over to you for any closing remarks.

Thank you very much.

And as a number you noted graciously, this is my last call.

There are many of you who I have dealt with for considerably more than a decade.

I would like to take this moment to thank you all for your support.

You were very insightful and you stood by us while we transformed our Company.

Believe me, this is a spectacular management team and the trajectory looks absolutely wonderful.

The Company is not only performing well and aggressively upward mobility going forward, but it is a very, very sound and stable foundation.

Thank you all and congratulations to Mark and Manny.

Have a great day and you will see them on the next quarter call.

This does conclude our teleconference for today.

We would like to thank you all for your participation.

You may all now disconnect.