PVH Corp (PVH) 2005 Q2 法說會逐字稿

Good day, everyone, and welcome to today's Phillips-Van Heusen Corp. second-quarter 2005 earnings release conference call.

Today's call is being recorded.

This webcast and conference call is being recorded on behalf of PVH and consists of copyrighted material that may not be recorded, reproduced, retransmitted, rebroadcast, downloaded or otherwise used without PVH's express written permission.

Your participation in the Q&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 contain certain forward-looking statements which reflect PVH's view of future events and financial performance as of August 24th, 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 undertake any obligation to update publicly any forward-looking statements, including without limitation, any estimate regarding revenues or earnings.

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

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

At this time, I'd like to turn the call over to Mr. Mark Weber, Chief Executive Officer.

Please go ahead, sir.

Good morning, everyone.

I am joined today by Manny Chirico, our President, Mike Shaffer, our Executive VP of Finance, and Pam Hootkin, the corporate Treasurer and Head of Investor Relations for our Company.

Welcome to our call.

Thank you for being here.

I'd like to start by telling you that over the last couple of months, we have made a road show, where we visited with so many of you who are on this call.

I can tell you personally I enjoyed it immensely, having the opportunity to talk to you folks and share with you our Company strategy and our business goals.

And in particular, I would like to thank all of our new shareholders.

We welcome you into the fold and hope that you do very well in support of our Company.

We are very excited about the results that we have placed for second quarter.

Our positive trends that we experienced through the first quarter continued.

Our business model is working and all of our businesses are performing either at plan or better than plan.

In particular, our legacy business's dress shirts, is led by Van Heusen, who is performing exceptionally well throughout America;

Geoffrey Beene, our designer products; as well as Kenneth Cole and Calvin Klein.

All of those businesses are reporting very good results.

In addition, the new launches that we put in place for last year, namely Donald Trump, BCBG and Chaps, have been very, very strong, as well as Sean John, as a start-up operation for us in dress shirts.

Our sportswear business continues to be extraordinary, led by IZOD and Arrow.

Both of those brands are exceeding plan and doing better than even we envisioned for the year.

The launch of Calvin Klein men's sportswear continues to go on plan or better than plan and we truly have one of the most successful launches in our history.

We feel very, very good about Calvin Klein men's sportswear.

Having said that, Calvin Klein as the growth engine for our Company is performing very, very well.

Our fragrance business is very strong.

Our jeans business and underwear business continues to do well through the efforts of our licensee partner, Warnaco.

And some of the new licensees that have been launched, like women's footwear, women's coats and outerwear, have performed better than plan.

So all said and done right now, we're very pleased about our second-quarter earnings and we feel very good about where we are going into the year.

With that, I'd like to turn over the call to Michael Shaffer, the Executive Vice President of Finance.

As Mark said, we're pleased with our second-quarter results.

Total revenues grew 18% in the second quarter to 443 million.

Our core businesses in both dress shirts and sportswear continued to perform well.

The new lines introduced in dress shirts, Chaps, BCBG, Sean John and Donald Trump added to strong core dress shirt performance.

In our sportswear division, the Calvin Klein sportswear collection introduced in fall '04 contributed to our growth and added to strong performance in IZOD, Arrow and Van Heusen.

Our retail business had a strong quarter with comp increases of 5% and we're continuing to successfully open Calvin Klein outlet stores in premium outlet centers.

As Mark said, we completed the secondary stock offering.

My comments on the second quarter and full year exclude the costs associated with the secondary offering.

EBIT for the quarter increased 48% over the prior year to 45 million, while EBIT margin improved 210 basis points in the quarter to 10.2%.

This increase was driven by strong revenue growth, 140 basis point improvement in gross margin and the continuing leveraging of our expenses.

Our gross margin improvement was driven by lower cost of product and strong sell-throughs at retail leading to more full price selling.

Earnings per share increased over 50% to $0.43 per share and was $0.02 ahead of the consensus estimates and at the top end of our previous guidance.

From a balance sheet perspective, we ended the quarter with 171 million in cash after funding the costs associated with our secondary stock offering.

Our net debt position improved 27 million against the previous year.

Our inventories are very clean and on plan with a 20% increase over last-year levels.

The increase in inventories supports the 13% planned sales increase in the third quarter and an acceleration in our inventory in faith (ph), particularly from China, in response to uncertainty in the global sourcing situation.

Looking forward, given the strong trend of our business, we are projecting third-quarter earnings of $0.67 to $0.71 per share, which represents a 14 to 20% increase over the prior year, with corresponding revenues of 525 to 535 million or an increase of 11 to 13% over the prior year.

For the year, given our strong results for the first half and our third-quarter projections, we're raising our 2005 earnings per share guidance to a range of $1.75 to $1.80, which represents an increase of about 30% over the prior year with corresponding revenues of about 1.9 billion for an increase of approximately 15%.

We continue to maintain a conservative view of the fourth quarter.

If the current trends of our business were to continue, we believe we would exceed our second-half estimates.

A final note, please keep in mind that 2005 earnings per share guidance does not include the cost of expensing stock options.

We will begin expensing stock options in 2006.

The impact of stock option expense, had we recorded this expense in 2005, would be about $0.10 per share.

This expense should be considered when you prepare your financial projections for 2006 and beyond.

And with that, I'll turn it back to Mark.

Thank you, Mike.

Sara, we're prepared for questions.

(OPERATOR INSTRUCTIONS).

Melissa Otto, DE Research.

Good morning.

Congratulations on a good quarter.

Just a question about the collection businesses -- the collection business in retail.

It looks like in the footnote, you guys had some rearranging of your revenue.

And I was wondering if you would one, give a little bit more color around that; and two, talk about the operating performance for that business.

Sure.

This is Manny.

I'll focus in on that.

When we were on the road talking about our business, it became clearer and clearer to us that the collection business, which represents the three retail stores -- flagship Calvin Klein stores that we operate ourselves -- and we had classified those as part of the Calvin Klein segment -- was confusing some people.

The Calvin Klein licensing and design segment, people viewed as a licensing segment, so we made the determination to reclass it out of the licensing segment and to put it into our apparel segment in the businesses that we operate.

So all we have done is reclassed the two components of that and in essence, transferred out top-line sales out of that segment on an annualized basis, of about $11.5 million and on an annualized loss in 2003 of about $8.1 million.

We view all of that business as marketing the Calvin Klein brand.

It's an investment we make in order to support the brand.

That business is budgeted and planned to lose those monies and we continue to -- that business is running more or less right on budget and right on plan for us.

Okay.

Just switching gears, a question on China.

You had mentioned that the gross margin was seeing some benefit from the store thing and your initiatives there.

Would you give a little bit more color on that, and any specific numbers that you're able to give out would be very helpful.

We're expecting gross margin to continue to perform, similar to what we have seen in this quarter.

We are looking for gross margin improvement for the balance of the year somewhere in the neighborhood of 40 to 50 basis point improvement.

The drivers in the improvement that we've seen in the second quarter, which was about 140 basis points, was a combination of cost savings and more full-priced selling, as Michael laid out in the plan.

So we will continue to see cost savings going forward based on product, cost savings that we have seen, and we're very comfortable with that 50 basis point improvement.

That's great.

Thank you very much and congratulations once again.

Jeff Klinefelter, Piper Jaffray.

Congrats as well.

Another great quarter.

A couple of questions.

One, just housekeeping, on inventory up 20%, appreciating some acceleration of receipts.

Would you expect that to sort of normalize I guess at the end of this next quarter to be in line with overall revenue growth, or will you be carrying -- kind of what's your plan in terms of carrying inventory going forward?

And then one on dress shirts, the business has obviously accelerated this year nicely from trends in the last couple of years, recognizing maybe some of that -- the resurgence of demand for men's dress apparel.

Also, you've been launching some new brands.

When we think about that going forward now as we anniversary some of those launches, are you taking shelf space and growing faster than the industry so we can assume that some of this growth is momentum that you would be able to maintain going forward versus kind of reverting back to a mean growth rate for that category overall?

And then just lastly, your guidance is great for the third quarter and, clearly, your momentum continues across all your businesses.

There were some concerns beginning of August that sales had slowed in the industry -- industry-wide.

Any color on sort of what you are picking up from retailers via your bookings guidance?

Okay.

It's Mike.

I'll take the first on inventories.

At the end of the third quarter and at the end of the year, we are projecting inventories to be more in line with sales growth.

So this slight increase in the second quarter that you see and as it relates to the acceleration of product from China, we expect to not be there in the third quarter and at year end.

As it relates to the conversation of dress shirts, you're correct.

We've been experiencing exciting growth in the dress shirt business.

This is a combination, as we shared with a number of you on our one-on-one meetings, that the dress shirt business is very, very strong.

It's a combination of one, people dressing up wearing shirts and ties and suits again; two, the casualization (sic) of America in the workplace is affording dress shirts a great growth vehicle because an awful lot of people are wearing dress shirts with a pair of gray pants or slacks and khakis.

And that is a new phenomenon as well, continues to grow.

And at night, guys are wearing shirts worn outside their pants with jeans and in various different outfits and that trend continues.

So shirts, again, are being worn in a number of different situations and that trend continues and we feel very, very good about our momentum.

As it relates to some of the new launches, we haven't seen a full fiscal year on a number of those launches and we will enjoy a full fiscal year when we look at it next year.

On the subject of sales, third quarter --

The trends in our businesses, we haven't seen a slowdown.

I know when we look at it, you've seen a lot of retail reports, particularly talking about gas prices and slowdown, our retail sales have not slowed down in August in our own stores.

And our sell-throughs in department stores, we see those on a weekly basis flash from department stores.

We have seen no slowdown there as well.

So we said to be concerned.

We're trying to manage inventories, manage our gross margin, and we've seen -- we read the papers as well and see the press releases.

But we haven't experienced any kind of a slowdown in our basic retail business or in our wholesale business that we've seen so far.

So the color of the business continues to be very strong.

That's great.

One final follow-up, Mark, in terms of your dress shirts, striped dress shirts also, a lot of investors are sort of concerned, is that a fad that seems to be fading and was unsustainable growth over the last several quarters.

When you look across the retail channels today, as people prepare for fall and holiday, it doesn't appear that that has changed; from high end to low end, it appears that stripes remain a very substantial part of the assortments out there.

Any color on that?

Well, I can only say that we believe our inventories are balanced properly.

The results that we are receiving -- when I say balanced in this case between solids and stripes or fancies, we believe we are in sync with the market and have the right proportion of business.

We have not seen a slowdown, but should it move from stripes to solids, we are prepared to maximize either way.

Both are performing very well and, obviously, the solid color business is even stronger than the stripe business.

Great.

Thank you.

(OPERATOR INSTRUCTIONS).

Bob Drbul, Lehman Brothers.

Good morning.

Congratulations.

A couple of questions on the Calvin Klein business.

Can you give us an update on door count and what your expectations are for the men's sportswear business for this year?

The door count -- we finished last year at about 250 doors and we expect to be over 500 doors by the end of this year.

Our financial plan is the same, we are 380 today and our financial plans are on track to either meet or exceed those numbers depending on the trends as we continue forward into the year.

Where are you with the launch with Dillard's in terms of the door count there?

We have an exciting launch with Dillard's.

Dillard's is getting behind this brand.

They believe that it will add incremental volume to their store.

Shops will be ramped up in the third and fourth quarter both in men's wear and women's wear and a number of other categories and we feel very good about their ability to exist in this marketplace with this brand.

Okay.

And then just one final question.

Can you elaborate a little bit on the Arrow brand and how that's performing within the different retail partners that you have?

Sure.

We're very excited about the performance in Arrow.

I think we have demonstrated two things to our retail partners.

Number one, that the brand is extremely strong and has a following out there with American consumers.

And number two, our Company has the ability to execute whatever we tackle.

We deliver the product on time and the fashion that's right at price points that people are responding very well to.

We are thrilled with the success we have had, and I would think if you talk to Kohl's or Sears or Mervyn's, for that matter, and ask them about the Arrow brand and its performance, you'd hear similar results from them.

Great.

Thank you.

Lee Backus, Buckingham Research.

First, congratulations.

Let me add my congratulations to a great quarter and a great year.

Mark, could you talk a little bit about the rationalization of the outlet stores -- where we stand.

And actually I think you are opening a few outlet stores now under Calvin Klein.

We feel, once again, very good about our outlet stores.

For the past quarter, we had a 5% comp store increase.

The trend in those stores is doing very well.

We have not seen any effect with the price of gas affecting those stores.

We have closed close to 200 stores, as we said we would and we have done.

We believe we have an outlet channel that is rationalized that makes sense.

Any stores that don't perform, that don't meet the thresholds we need, we close.

But we have seen an uptick in that business and feel very good about where we are going.

And yes, we are opening a relatively small chain of Calvin Klein outlet stores as well.

It will be a chain comparable to some of the other designers, but in total number, less than some of the ones you compare us to, and they're performing very well and we're very pleased on the reactions to those particular stores.

Also, maybe you could talk a little bit about the Arrow brand acquisition that you made at the end of last year, what that has meant to you.

And maybe you could just talk about licensing opportunities either with Arrow or with IZOD, licensing opportunities outside of just the Calvin Klein brand.

As it relates to Arrow, as I said a moment earlier, our dress shirt expectations and our sports shirt expectations have far exceeded where we were when we purchased the brand.

The response to the brand in terms of consumers has been extraordinary.

We are very proud of our ability to execute.

We are a major player in Kohl's and a major player in Sears, and that particular brand has given us a raise on detra (ph) and an entrance into the midtier channel of distribution that's performing so well across America.

Our relationships with those stores are very strong in part and parcel because of that brand and our ability to execute.

As you may be aware, the Arrow brand exists already throughout countries around the world and it's performing pretty much as planned and we continue to look for new opportunities.

In the case of IZOD, in the United States, our licensees have done very well.

Outside United States, the name is not known well.

Yet, a number of companies from around the world have seen it when they visit the United States and have shown interest in their willingness to develop that brand outside the United States.

We are proceeding very cautiously and trying to find partners who are prepared to take a well-executed business strategy with great product with a name that's not well known to their shores.

And as we find partners that make sense to do that, we will do it.

But there is very little growth planned in either of those two businesses in the licensing category at the moment.

And anything that we would find would be plus to what we are already doing.

Okay.

And one last question on corporate expenses.

Manny, could you just talk about the increase in corporate expenses?

Sure.

That's really a big component of that is being driven by incentive compensation.

It's up about $3 million.

We expect that the comparisons for the year will continue -- there will be some growth in the third and fourth quarter, but not to the level that you saw in the third quarter -- in the second quarter -- I'm sorry.

So there was some growth there tied to incentive compensation.

Thank you.

Dennis Rosenberg, DSR Consulting.

Good morning and let me add my congratulations.

Could you give us a little bit of color on what your assumptions are for the conservative estimates for the fourth quarter relative to how you've been doing to date?

Sure.

Dennis, in the fourth quarter, we're planning comp stores about flat.

We are planning for a significant increase in advertising dollars of plan, and we're committed, as we said from the beginning of the year, we have an acceleration, particularly in the Arrow brand of spending advertising dollars in the third and fourth quarter, but particularly in the fourth quarter as we roll it out.

And we are planning basically our wholesale businesses to be up about 6 to 8%.

And a significant amount of that is driven by the Calvin Klein men's sportswear opportunity.

Okay.

So if there is upside, would it be primarily in retail comps or would it be in some of the other areas?

If there is upside, it will be in retail comps and gross margin improved -- continued improvement.

Okay.

And the option expense kind of came over garbled.

Was that $0.10, did you say for this year?

Yes, the option expense this year is about $0.10 a share.

Okay.

Thank you.

Susan Stansbury (ph), Miller Tabak (ph).

Hi.

I just have a quickie question going back to inventory.

In the first quarter, I think you indicated that early shipments are bringing in volume.

Merchandising early amounted to $15 million.

Do you have a number for the second quarter?

It's about 12 to $13 million.

Okay, great.

Thanks very much.

Elizabeth Montgomery, S.G. Cowen.

Congratulations again.

Most of my questions have been answered, but I did have one about Q4 of last year.

Can you just remind us what the impact from the outlet store closures was in that quarter?

Say that again, Susan?

What the impact of the outlet closures last fourth quarter.

Last year's fourth quarter did not have -- there was an impact on store closing, but there wasn't a charge or any expense associated with that.

The store closing or expenses associated with that were all provided for before, and the $0.28 I think that we made in the fourth quarter is clean of any of those hits (ph).

I guess I was actually asking did you benefit a little bit because if I remember it correctly, I think you had initially planned for a hit to gross margins in that quarter because of the closures and then you didn't really get that hit to the same degree that you had thought you might.

We're performing better, we're selling better, our margins are better, and that's what you're seeing reflected.

Yes.

And in the fourth quarter last year, we were very -- we had a very strong quarter.

Retail overall, we put on comp store -- significant comp store increase when we were planning flat last year.

So those two items coupled, and the strong gross margin performance in retail was part of the earnings upside that occurred in that fourth quarter last year.

We are planning though against a very strong -- against a relatively strong holiday season last year, we are planning for flat comps.

Our trends are much ahead of that, but we're trying to be conservative in our estimates.

Okay.

That's very helpful.

And then just to clarify, your exposure on the Federated/May consolidation is not that significant since the dress shirt business is largely a replenishment.

Is that correct?

Our position on Federated/May is that we applaud this transaction.

We think Federated has demonstrated that they have the ability to sell quality merchandise of great brands throughout America, and we feel very good about that.

However, it's not clear to us yet what their position might be on some of the moderate brands and we'll find out as we go along.

Our total exposure to Federated/May is 12% of our yearly sales and, therefore, the balance of distribution is that we have, through our own stores, through other channels of distribution, like the midtier channel, makes us less vulnerable than some other people.

But it all remains to be seen.

Okay.

And then is there any impact do you think if Vestimenta actually sells your Calvin Klein Couture license?

From a financial exposure, there will be no exposure to us at all based on how the agreement -- how the transaction potentially might work.

And the operation that we're managing all the way through that whole process.

Okay.

And from a brand positioning or anything like that --?

We feel that the collection business represents a halo for Calvin Klein.

It's not a profitable halo.

We expend a significant amount of money to keep that halo out there.

As we said to you earlier, between 8 and $10 million a year to operate three collection stores ourselves, which we just view as marketing and a way to enhance the overall image of the brand that filters down.

Having said that, Vestimenta is committed through contract to perform, and should there be a disruption with Vestimenta, we feel very confident that there are other alternatives.

But we believe in this collection business for the reasons I just articulated.

Okay.

Great, guys.

Thanks a lot.

You did a very good job.

Jennifer Black, Jennifer Black & Associates.

Good morning and let me add my congratulations as well.

I wondered if you could talk a little bit if you have some new licenses on the horizon with any of your brands.

Is there anything at all you can share with us?

That's a good question.

The answer is yes.

There are a number of new initiatives that we have on deck.

Whether or not we should be sharing them right now -- we've announced to you that -- maybe a little prematurely -- that we have an agreement on cosmetics and color -- makeup, if you will.

We are days away from actually signing that and we feel very good about the opportunities there.

And of course, the launch of Bridge apparel in Europe, where we have announced -- that hasn't started yet, but that will start rolling out next year.

Those two businesses we think have very large potential.

I should point out that the transfer of our fragrance business to Coty, we feel very, very strongly about their ability to execute.

We're really dealing now with professionals in their channel versus people from Unilever, who really were dealing with this business almost as an afterthought with all due respect.

They have other businesses that were much larger.

So the combination of a couple of new licenses that we have announced publicly and our belief in Coty as a company makes us feel very good about what's going forward.

Having said that, Jennifer, we can assure you there are a number of categories that are large, that have opportunities, that people are buying for in the Calvin Klein area, and in the near future, you will be hearing about more of them, but it's premature to tell you what they are in this call.

Do you have any updates at all on the women's license?

Sure.

The question of course is related to Kellwood and their license with us on Calvin Klein women's.

Kellwood & Co. have had difficulties in the launch.

Unfortunately, as opposed to what we have done in men's, where it's been relatively smooth.

The Kellwood people and their teammates are smart people.

They have been analyzing the business.

They understand where their mistakes have been and where their hiccups (ph) have become.

We have authorized the use of a couple of logos for Calvin Klein which we think will help their business and encourage them dramatically to look at their price points and their casual line to enhance what they've already done pretty well in their women's to work line.

We believe that they are getting their arms around this business and that their improvement will be felt shortly.

Having said that, I feel very confident that their business partners out there want Calvin Klein women's to work and they're going to be behind them all the way and that's where we sit today.

Okay.

That's great.

And then I just have a few more questions.

I wondered if you could talk about the -- I know you talked about comps -- but about the productivity per store with your outlet division, and how you feel about that.

And do you think that -- do you have goals as far as achieving a higher profitability in those stores?

I know you guys are experts at that.

I just was curious about your thoughts.

Jennifer, we have -- as our comps increased, as you know, obviously our sales per square foot has been increasing.

In addition, the opening of the Calvin Klein stores have exceeded all of our plans.

We are running -- because of the brand recognition and the strength of that brand -- we are running significantly higher sales per square foot numbers in our Calvin Klein stores, and as a result, those stores are much more profitable than our more moderate brands would incur.

When we look at our retail business, as you know, we don't look at that as a growth vehicle.

It's a great cash flow contributor; covers a lot of overhead; but we look at the base of stores, we'll be closing some, we'll be opening some.

And with the exception of the Calvin Klein rollout that will happen over the last -- that's occurred over the last few years and will continue into next year, that's basically a business that we look at small top-line growth.

We have enhanced the profitability through gross margin improvement and with getting the comp store increases, leveraging operating expenses there.

Those businesses are operating at very high levels right now and we're very happy with the performance.

Great.

I just have one last question, and that is oil.

Any impact at all on your shipping by vessel?

Well, I think everybody realizes that freight costs, intake costs, are up.

That's the implication that we've had to deal with.

But on a relative basis, when you look at that impact on our product costs, it's very de minimus.

And the kind of cost savings that we've been experiencing with the sourcing benefits around the world, with the elimination of quota, being able to move product around, has more than offset any kind of fuel surcharge of the costs that we have incurred.

And the real issue that we have been concerned about when it comes to fuel costs, like everyone else, is the impact that's going to have on the consumer and the potential impact that it could have on our outlet store business from the point of view that many of those are drive-to locations, located out of main population centers where it may be a thirty-minute drive to get to a great outlet center.

And has that had the potential to affect our sales?

We haven't seen it yet, but we monitor it all the time.

Great.

All right.

Well I'm looking forward to seeing you guys at MAGIC.

(OPERATOR INSTRUCTIONS).

Robert Rossetti, Morgan Stanley.

My questions have been answered.

Thank you.

It appears we have no further questions.

Well with that, I thank you all for participating.

As I said, it was really great meeting you all along the way.

Questions are always great.

You are doing what you need to do to understand us and we are hopefully doing what you need to invest in us.

We feel very good about the year to date.

We feel very good about the balance of the year and we look forward to reporting to you on our next call.

Thank you, everyone.

That does conclude today's conference.

We thank you for your participation and have a great day.