PVH Corp (PVH) 2005 Q3 法說會逐字稿

Good day, everyone, and welcome to today's Phillips-Van Heusen Corporation's third-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 question-and-answer 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 November 22nd, 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 website and in the Company's current report on form 8-K furnished to the SEC in advance of this webcast and call.

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

Please go ahead, sir.

Good morning, everyone.

Today I am joined by Manny Chirico, our President and Mike Shaffer, our Executive Vice President of Finance and Pam Hootkin, our VP and Treasurer and point person for Investor Relations.

Good morning.

We are very pleased with the results that we have had in the third-quarter and year-to-date.

We are excited to be presenting to you today because of these results and we are very proud of all of our divisions for contributing at this time.

Our business for the third-quarter was particularly strong in CK and Calvin Klein and our licensing network.

All of our licensees are doing well, but particularly we would like to call out and congratulate Coty for the launch on Euphoria which is one of the strongest new launches we've had in fragrance for a very long time.

Our sportswear business has been particularly good, led by Calvin Klein in our new sportswear collection, but it's important to point out how strong IZOD has become to our total and continues to do very well.

And we are thrilled with the results of Arrow in the mid tier channel particularly Kohl's and Sears and Mervyn's.

Our sportswear business is really performing above expectations.

At the same time, our dress shirt business continues to perform very, very well led by our new launches namely Donald Trump, Chaps, and Sean Jean.

But our core brands continue to drive the dress shirt business.

Our Van Heusen business has been nothing short of extraordinary in performance, not only in the Federated doors that currently exist but in all the May Company doors that converted to Federated.

Additionally, Geoffrey Beene has performed very well as the largest designer dress shirt company in America, it continues to perform and we are very pleased with the results.

And also, to point out that Kenneth Cole, a very strong brand in our dress shirt arsenal is performing very well in the channels of distribution that it's operating.

Our momentum is there.

Our performance is strong and therefore, as we see after the first few weeks in the fourth quarter of November, our momentum continues, our business continues to perform at or above expectations and because of that, we have decided to take up our year as you have seen in our release and we are very pleased with the potential between now and the rest of the year for the Company.

And with that I will turn the business over to Mike Shaffer who will share with you some of the details.

Thanks, Mark.

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

Total revenues grew 13% in the third-quarter to 533 million.

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

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

In our sportswear division, the Calvin Klein Sportswear Collection continues to outperform the competition and added to the strong performance of IZOD, Arrow, and Van Heusen.

Our retail business had a strong quarter with comp increases of 3% and we continue to successfully open Calvin Klein outlet stores in premium outlet centers.

EBIT for the third-quarter increased 29% over the prior year to 71.6 million while EBIT margin improved 170 basis points in the quarter and ended at 13.4%.

This increase was driven by strong revenue growth and a 240 basis point improvement in gross margin.

Our gross margin improvement was driven by lower cost of product and strong sellthroughs in retail leading to more full price selling.

Our expenses for the quarter increased 70 basis points for the prior year, as a result of a significant increase in our brand marketing expenses this year versus the prior.

Earnings per share increased 24% to $0.73 per share, and with $0.03 ahead of the consensus estimate and $0.02 ahead of the top end of our previous guidance.

From a balance sheet perspective, we ended the quarter with 170 million in cash; our net debt position improved 76 million against the previous year.

Our inventories are very clean and on plan with an 8% increase over last year levels.

The increase in inventory supports a 12% planned sales increase in the fourth quarter.

For the year, given our strong results for the first nine months, we're raising our 2005 earnings per share guidance to $1.90.

This represents an increase of about 39% over the prior year with corresponding revenues estimated at about 1.9 billion, or an increase of approximately 16%.

We are projecting fourth-quarter earnings of $0.28 per share which is flat to the prior year.

Included in the fourth-quarter projection is a planned charge of $4 million or $0.05 per share, which will lead to a pension settlement charge triggered by the early retirement of Bruce Klatsky, our former CEO.

In addition to the pension charge, we're also planning a $5 million increase in our brand marketing expense for the fourth quarter.

Our revenues for the fourth quarter will be 455 to 460 million for an increase of 11% over the prior year.

Our 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 the expense in 2005, would be about $0.15 per share and would reduce the Company's 2005 earnings per share to $1.75.

Looking out beyond this year to 2006, we are projecting our earnings to grow 15 to 20% which equates to earnings per share of 2 to 210 -- $2.00 and $2.10 -- with corresponding revenue increases of 4 to 5%.

Our 2006 guidance does include the impact of expensing stock options with the charge of $0.10 to $0.11 per share.

And with that, Miranda, we will now take questions.

(OPERATOR INSTRUCTIONS).

Jeffrey Klinefelter.

Piper Jaffray.

Congratulations on another great quarter and a great year so far.

I wanted to talk a little bit about a couple of sportswear categories.

First of all, in the dress shirts, you guys had a lot of success this year with I think overall sales growth, as well as new launches fueling that sales growth.

Could you put into context now how the dress shirt business is performing as a percent of your total wholesale business this year kind of versus where it was last year, the growth rate you're seeing in that?

And, kind of how we should think about that business going forward, if it reverts to a mean sort of historic growth rate or if the launches of these new brands will continue to fuel it beyond that.

Well, let's see if we can tackle some of them.

The dress shirt business represents about 25% of our total business.

The dress shirt business has been very strong.

It's appealing to men in -- I would tell you -- in three different ways.

One is the dress shirt with the tie, one is the dress shirt without a tie, and at night, for casualwear, dress shirts have had a major impact on the marketplace and we are there, performing well, and servicing that market whether it be solid color dress shirts or fancy dress shirts.

So we feel very good about it now and we feel very good about going forward.

Brands that are in our stable, brands that we own and brands that we license are the market leaders, and we feel good about it.

Can you share with us, Mark, a little bit more about the growth rate this year kind of how that compares to historic growth rates and how we should think about that in your guidance for next year?

Well, in the early part of the year, we saw double-digit increases in the dress shirt business and towards the third-quarter, it started to flatten out in the single digits.

We still feel very good about that going forward.

We have never planned our dress shirt business as a growth vehicle in the Company, it's always been very cash positive, and it's never been designed to be a growth vehicle.

So when we go into future seasons, we plan it relatively flat and then we see which way the business develops.

We do have the inventories and the system to capture whatever is out there.

Great.

And just a follow-up on the Arrow brand.

I know once you acquired that, there was going to be a step up in marketing to support that which I think we're starting to see.

Maybe just some update on how effective that has been so far.

And maybe some more specific successes -- I know you noted that in your introductory comments in the moderate channel.

And I believe you were also looking at leveraging the international distribution of that brand -- some of the distribution that it already had and maybe leveraging that to help you further your international distribution of Calvin Klein and perhaps some of your other moderate brand.

Let's answer the first question.

Yes, we've been heavying up on our advertising expenditures in Arrow this year.

Hopefully you've started to see some of the ads that they are running in some of the best magazines in the country and we're starting to put them in the various (indiscernible) newspapers including USA Today, the New York Times, and The Wall Street Journal.

The issue with Arrow is it had been dark.

It hadn't been advertising for quite some time.

And as we started to advertise Arrow, we had a concern that consumers didn't recognize the brand the way they recognized some of our other brands like Van Heusen and IZOD.

So we first started doing institutional advertising, but I think we became aware that perhaps we needed to be a little bit more specific and lead the customers towards where they could find the brand because it wasn't as readily available as some of our other national brands.

So to that end, we started tagging Kohl's in our ads and we believe they're very effective now in telling the consumer that Arrow is America's shirtmaker and they are available at Kohl's.

In terms of the international efforts that are taking place, we're very pleased with what we have seen with Arrow around the world.

Arrow had been the leader around the world even vis a vis our Van Heusen distribution in dress shirts and we always were very envious of it and we're now very pleased to be a part of that.

But the Calvin Klein business is separate and apart from the Arrow business and there is no synergy between them.

One's a dress shirt business and the other is a multichannel, multibrand strategy throughout the world for Calvin Klein.

Okay great.

And then just lastly on the balance sheet, clearly getting stronger every quarter, any thoughts for what your target's sort of debt-to-cap would be in this business and then a use of cash -- is there a buyback strategy coming?

Jeff, you know, our biggest strategy has been to reinvest back in the business.

We -- as we build cash, we will take a hard look at our capital structure.

We like to target our debt-to-equity somewhere in the 30% range debt-to-equity.

With that exception, we haven't made any judgments yet about what to do with the cash, and we continue to think about acquisitions that we would bolt onto the existing base of businesses that we run today, so that would be our first priority at this point in time.

Great.

Thank you.

Good luck with the holidays.

Dennis Rosenberg with DSR Consulting.

Congratulations.

Just to follow up on that last comment about acquisitions, your name has come up as a potential acquirer of a major brand that unlike Calvin Klein is mature in the U.S.

I know you can't comment on that, but could you update us on what your acquisitions for Philosophy might be?

Our acquisition philosophy has been stated before.

It is simply this.

One, we want to acquire brands that consumers know, not brands that need to be fixed.

Number two, we would like to be in businesses that we feel very comfortable with, namely men's apparel followed by women's or children's if we think it makes sense.

But our number one priority is not to fix brands.

We have the capacity in-house of taking more.

We are very, very strong in our sourcing and our back office, our IT, and generally speaking, companies that need a fix in the back office are what we would love to find.

But whether there -- our first priority is to be with a brand that consumers know whether it be here or around the world and we would be very interested in continuing to develop brands outside the United States as well as inside.

Okay.

And on your guidance, could you walk through the segment assumptions in arriving at the '06 sales growth of 4 to 5% and 15 to 20% EPS growth, and what your retail comp assumptions are for '06?

I didn't hear all of that, but I'll give you what we have.

The apparel-related products segment, we're looking at about a 4 to 5% sales increase.

On the licensing segment, looking at about an 8 to 10% revenue increase.

And on the outlets, we're somewhere around 1 to 2%.

Okay, and do you see the margin potential coming mostly because of the growth in the licensing?

Yes, the mix will help us to some degree, but our wholesale margins and our retail margins are also performing well.

We are expecting about a 30 to 40 basis point improvement in overall margin.

In '06?

In '06.

Okay, and you've developed a record of consistently beating your guidance.

If you were to beat the guidance again next year, which do you think would provide the most upside potential?

It would have to be Calvin Klein license.

Okay, the rest you think is pretty much on target, then?

Well, it's early in next year to be talking about beating our estimate.

I think the third quarter, we have improved dramatically and we've taken up our estimate for the balance of the year.

I think it's a little premature to be talking about upside potential in 2006 as write-down.

Okay.

Keep up the good work.

Thanks.

Omar Saad (ph).

CSFB.

Thanks.

Congratulations on a lot of the success you guys have achieved with the business.

I wanted to just ask a couple of quick questions.

With the momentum you're clearly seeing in the quarter and given your outlook, and maybe some of the other apparel brands out there aren't quite achieving the same success.

I think there's a lot of kind of caution around the Federated May situation in those store closures.

Could you kind of maybe elaborate a little bit on what's driving the success that you have been able to generate and what your kind of outlook is, relative to that specific merger of the Federated May stores.

We have a very strong team of people who have worked together for a while, number one.

And they know what to do and they know what's required of them.

Our interests have always been on providing the right product at the right price and staying out of inventory trouble.

With the advent elimination of quota, the opportunity to source around the world more competitively and buy from the people you'd like to buy from is helping all businesses, particularly ours.

We're talking about today a company that has a myriad of very strong national brands that are priced at values that the consumer is responding exceptionally well to.

We get to the right prices quickly and the consumer purchases at those first prices.

With the advent of Calvin Klein which was a brilliant move for our Company, we see an increase in our licensing business and we see a company that has a number of very well-developed licensing partners who are experts in their field who are maximizing the businesses that we've licensed to them.

And in addition to that, we have signed on a myriad of new partners in Calvin Klein, in areas that we felt heretofore Calvin Klein was devoid of and that's why we purchased the Calvin Klein business.

And those businesses are starting to roll out and we're starting to see the fruits of our labors and the seeds that we planted a year and a year and a half ago with these new licensees.

And in simple form that's what it really represents.

Now we've also increased our marketing budgets and it's pretty difficult at this time to pick up any magazine of quality in the United States without seeing an ad on IZOD or Calvin Klein or Arrow or Van Heusen.

We believe that's really helping our business as well.

So in a nutshell, the right people, the right brand, the right products, priced effectively and the marketing behind it.

That's our formula.

Great.

And with the consolidation at retail whether it's Federated May, or the Sears retail situation, what's your kind of view on that and how do you manage through that?

And do you see an impact with the 82 store closings?

Well, first of all, all of those closings are already factored into our guidance.

Clearly, closing 80 stores is going to have an impact, but we factored that in.

Did I answer your question?

Yes.

And what about -- what's your sense of -- you hear a lot of our retailers focusing more on private brands and exclusive brands and being differentiated from each other.

How do you view the impact on your business of that kind of trend that continues to gain momentum it seems?

First, I would say to you that every year when we approach the business, someway, somehow, we are told that private label is going to take a bigger portion of the business.

Retailers are going to consolidate and they want exclusivity and that has been going on for the last 25 years.

And it continues to do so.

We understand from our largest customers, including Federated May, that our brands are a very important part of their future going forward.

We have what it would take, we're going to be a major player with these stores and our sales and merchandising teams are hard at work right now understanding how we will roll out and what our future is in various different brands.

At the moment, as we have told you in the past, we feel very good about our positioning because we are performing so well.

If there was ever a time for this merger to take place where people have to assess who they want to be partners with, we couldn't have asked for a better time, particularly because of our brands and the way they are performing in both May Company and Federated.

Now, is that cause for concern in our industry and everyone in it?

Absolutely.

Every time there's a merger and disruption, you have to have faith that the surviving parties are going to know what to do with the business and make the right decisions.

We have every faith in the people that are consolidating and we know what we're doing.

So we feel pretty good about it.

That's great.

That's very helpful.

One quick question on Calvin Klein and the licensing business model.

When you look at kind of where the margins are now and the opportunity to leverage expenses in that business and you're still rolling out some of the new licensing and some of the new products and regions, where do you think you are?

And can you kind of give us an update on where you think you can go and how to think about that maybe on a long-term basis?

Okay.

As we add new businesses to that licensing model and as the existing licensing model -- licensing business grow, a disproportionate amount of that profitability falls to the bottom line.

We believe when we're look at this business that we would start to approach, over the next three years, close to a 50% operating income margin.

This year, we should end somewhere over 40% if you look at our segment reporting.

And over the next three years, we would expect that margin, that operating margin to grow anywhere from 2 to 300 basis points a year over the next two to three years.

So we would start to approach 50 basis points because the infrastructure is there, it is (indiscernible) there to support the business and as we grow the licensing income, both through new and existing agreements, then more, a larger proportion of that will fall to the bottom line.

So I think that's a good way to look at the business right now.

Great, thanks.

I appreciate it.

Bob Drbul.

Lehman Brothers.

I have a couple questions on the licensing business.

Mark, can you just provide an update in terms of the performance of the intimate license and the women's license, where you are with both of those and expectations for this year and for next year?

Which brand are you referring to?

The Calvin Klein intimate business -- and the women's business -- the women's better business.

Calvin Klein women's intimate business or Calvin Klein in underwear in total is doing very well.

The launch in Men's 365 is a new collection of underwear that is a complement to what's been there.

There was some concern there would be cannibalization.

From what we can tell so far, it's been an additive and we feel very good about that.

In the women's area, they launched a bra called the Perfect Fit, and that bra has been adopted in many stores around the country and the sellthroughs have been very good so far.

So we're seeing good things coming out of the intimate area.

I would say to you, in the case of this, this is a question better asked of Warner Cole (ph).

It's their business to run, but from our perspective, the master licensor, we're taking up our numbers in that category and we feel very good about it.

And in terms of women's sportswear, the one difficulty we've had in Calvin Klein has been in women's sportswear with Kellwood.

They dissolved their partnership with D- GAV (ph) because of fundamental differences in the way the business was run.

We agreed that the Company should dissolve and go their separate ways.

Our licensing agreement provides us with a fairly substantial guarantee minimum and guarantee advertising commitment and while they are not reaching the numbers we had hoped they would reach, our earnings are protected and the advertising continues to go on.

Now, we have confidence in the new management team's ability to turn this business around.

We have to give them some time and see how they progress.

That's pretty much where we are.

Okay.

And Mark, when you look at some of the recent licenses that you have added, which ones do you think are the biggest profit potential that are on the books right now?

Well, some of them are fairly substantial, so we have to be careful.

They're all pretty large opportunities.

The shoe license for both men's and women's has gotten off to a very strong start and while they are estimates to us initially we're very conservative.

These are the kinds of partners we picked.

We knew them very well from that.

One of the port suppliers to Bass, they give us very conservative numbers and they continue to exceed them.

We think that could be a very substantial license over the next couple of years.

As we announced in our press release, we have just signed with Markwins which is a very large cosmetics company and starting next year, they will launch Color in Cosmetics in Federated on an exclusive basis and we're very excited about that.

G3 has become our licensee.

They merged with Marvin Richards.

We're very, very pleased with Marvin Richards, who was our women's total license we established about two years ago, and we've given them women's suits and that too has a very large potential.

And probably, the largest potential unrealized yet is Coty.

While the Calvin Klein business continues to be a very, very important player in the fragrance business, the success of the new Euphoria launch I illustrated -- I called out at an earlier point in the presentation suspect Calvin Klein fragrance is one of the leading players if not one of the best in United States and around the world for both men and women.

And if handled properly with a company who is very aggressive about new launches, that could be the biggest incremental opportunity that we have even though that's one of our largest licenses.

So those are the big potentials unless there is something else -- and last but not least of course.

The sportswear in Europe which is rolling out now has perhaps the greatest potential next to the fragrance in my view.

But we will have to see.

A lot has to do with the execution and the partners you chose.

We provide all the insight we can and of course, we control the marketing, improve all the designs.

So we feel very confident with the partners we picked, but as in our guidance has demonstrated, we bought Calvin Klein because we thought it was anywhere from 2 to $3 billion worth of retail sales over the next five to seven years that was unrealized.

These are the licenses that are filling in, in addition to our sales in sportswear that will allow us to reach those goals.

Great.

And just one final question, can you -- you talked about the comp performance of your outlet business.

Can you talk a little bit about the traffic trends within the outlet business and your expectations going into the holiday?

We are pleasantly surprised to see the channel is robust.

We have enjoyed a very strong year.

All of our pharmex (ph) with the exception of Bass early in the year have done very well.

Bass has picked up in third-quarter and we're feeling pretty good about our shoe business right now.

But traffic has been different.

People are coming to those malls again.

(OPERATOR INSTRUCTIONS).

Melissa Otto.

DE Investment Research.

Congratulations on a great quarter.

Just a couple of questions to follow up on the margin questions that were asked earlier.

I'm just kind of curious if you could give a little bit more color around the actual margin expansion itself.

It looks like the apparel business saw about a 180 basis point year-over-year expansion in the operating margin for the apparel business.

And I was wondering could you specify what was driving that expansion?

Yes, we actually said in our -- earlier, it's been heavily driven by full-price retail being better than we planned, we're getting the goods out at higher retails, as well as we are seeing some benefits on product costs.

Is that driven by sourcing at all?

Absolutely, yes.

In part.

The product cost reduction is in part driven by sourcing benefits.

Could you maybe tell me a little bit about the allocation -- how much of it has been pricing, how much of it has been sourcing, or is it pretty evenly distributed?

I think you have to really look at it via business area.

But generally speaking, we've seen product cost benefits somewhere representing about 50% of the improvement and we've seen better sales (indiscernible) both in our own retail stores and at wholesale at about 50% improvement.

So you really have to look at it both that way and we are planning when we're looking out into the fourth-quarter, we know what the product cost benefits are coming forward, but as we look out, we're not counting on the continuation of margin improvement coming through from sellthrough.

So we are planning for appropriate promotional selling in the holiday season.

Okay.

And I'd just like to get an update on the number of doors for Calvin Klein.

Where is that?

We will finish this year about 519 doors.

That's pretty far exceeding the 375 I think you gave out last quarter.

What --

You have to remember that we opened at Dillards (multiple speakers) excess of 100 doors which, by the way, we start to see in the stores and it's looking pretty good.

We like the way the shops look and we like the positioning that we're getting.

Great.

And I was wondering if you could give some specific numbers around the performance in Europe -- economically, it's been pretty bad there, but it seems like PVH has seen some resilience in the market.

You know in general, all of our European business is done through licensees.

What we have seen is we have been negatively impacted by the euro overall.

But our account -- our biggest business in Europe is on Calvin Klein jeans business and we continue to see that business growing in spite of the tough market.

We were looking for even greater growth, but with what's gone on there, we haven't seen as much as we had hoped for, but still have seen high single digit increases on a euro -- on a local currency basis.

So it's been very good for us, the business in general.

Great.

Thank you very much.

Carla Casella.

J.P. Morgan.

A couple of questions.

The first on markdown, money or markdown risk as we go into the holiday, do you see it as any greater than last year?

Or are retailers starting to signal as they may ask for more markdown money because they're being more promotional during the holiday?

No, we don't see any of that.

Remember one of the reasons that we're enjoying the year that we've been enjoying is that the products that we have are positioned at prices that the consumer is purchasing.

And the products seem to be right that we put out there and the performance is such that we're just -- we've taken down a lot of our markdown requirements.

One of the reasons our business is better.

We're not paying the markdowns that we planned.

So the products that are out there now is our assortment that's going to go through holiday and we feel pretty good about it.

So our markdown budgets are intact and we feel good about it.

That's great.

And then in a typical year, do you typically see more of the markdown coming in fourth-quarter or is it first quarter anyway?

If there was such a thing as a typical year, I'd be able to answer the question.

Right now, the -- although in spite of the concerns of the economy and the price of gas even coming down to the level of debt, in spite of all of that, this category apparel is robust.

And brands are being supported.

And people are buying them.

And we see no slowdown in the trajectory that we have been enjoying.

And from whatever retailers we've had in our offices in the last few days and weeks, they're saying that business is pretty good.

Also, Carla, with our fiscal year end January 31st, so by the point in time, you've settled up fourth-quarter before year end.

So you -- maybe differently than some other companies year ends or whatever.

So we were -- definitely have captured all of the holiday markdown and the estimates of what those costs are by the time we closed our books on 1/31.

And it would all be behind us.

And that's by far, just because of the selling that goes on, is your largest markdown quarter.

That's helpful.

And then one question on, wondering if you are seeing any -- or changing your sourcing at all based on the quota changes that have been made and/or (indiscernible) tariffs (ph)?

The answer is of course we're looking at the world as a global market.

I assume you're referring to the recent agreement between the United States and China.

This was a good agreement for the apparel industry that put some surety and the ability to predict what might happen in China over the next few years.

This will allow companies like ourselves to be more confident that what we purchase there we will get into the United States.

Perhaps one of the biggest events in our industry in the last 25 years was the elimination of quota that has happened in this year, and that continues to drive companies, view of sourcing, and view of how they want to approach the world.

We have always been very strong in our capacity to go offshore, start up new ventures and be successful in delivering merchandise at fair values.

We will continue doing that based on these new agreements and very excited about the opportunity to have some clarity in the China situation.

Okay, great.

And then just one last question on your pick notes, do you expect to continue to pay in-kind dividends or are you paying cash dividends now?

At this point we're paying cash dividends.

Okay.

And that should remain in the same level -- is there any way that you could shake out additional notes or any intention to take out additional notes or debt with your cash balance?

At this point we've been paying cash dividends based -- since '03 -- the end of 2003 and that's our intention to continue.

Susan Stansbury with Miller Tabak.

I wonder if you'd be willing to discuss the outlook or potential for your European sportswear business.

I know you have articulated how much incremental business in the aggregate you expect to get from now owning and managing Calvin Klein.

And you've also articulated if I remember correctly, the potential global revenue contribution from men's sportswear -- better sportswear and women's better sportswear.

Is it possible to parse out just the European contribution?

We don't break out our individual licensees.

We don't break them out that specifically.

We've talked about that the international, that the U.S. domestic opportunity in Calvin Klein men's and better -- men's and women's better sportswear apparel and accessories, we felt was a $1 billion sales opportunity globally and we felt that international -- that it was a similar amount internationally.

So between the two at retail, there's a $2 billion retail environment, and we felt that that would grow over time.

We will not -- we will see very small sales for Europe next year.

The launching is late second half of the year.

So that's as far as we're going to go right now with that specificity.

Okay, qualitatively, is Asia -- does the Asian market have greater incremental opportunity than the Western Hemisphere or Europe?

Well, Asia is a vast land mass with a lot of people and very large population, and their economies are such that people can afford Calvin Klein.

We have a very strong partner in that part of the world doing men's and women's sportswear freestanding stores.

Last year, four stores were opened in Hong Kong alone and as we speak, stores continue to open in various ports of call.

They, our partners, are happy with the results.

We, the licensor, is happy with the royalties and the way that product is being executed.

There is opportunity and as they become more and more successful, they will open more and more stores.

So what is the ultimate opportunity?

We're always relying on the combination of real estate, cash in hand to open stores, and success to generate more success.

We will see.

Just refresh my memory.

Who is your partner in Asia?

Club 21.

Say it again?

Club 21 is the name of the company.

You would know them by our money exchange throughout the world.

Thanks very much.

Brad Stephens.

Morgan Keegan.

Good morning.

Congratulations on a great quarter.

Looking to the fourth-quarter, the additional $5 million in advertising spend, should we assume an increased level of advertising spend going forward as we model out next year?

Good question.

We have heavied up our advertising commitment as was called out earlier on Arrow.

Of course, you've seen so much of the IZOD advertising and Van Heusen taking place, this is the period in time where we look at our year and we are planning at the moment slight increases in advertising into 2006, which is inclusive of the numbers you would see in the fourth quarter of this year.

That became our new base.

So depending upon how the year goes, this how we spend the money.

As you can well imagine, we want to spend it all, but if there are hiccups, or difficulties, that's generally an easy place to take money from.

But as we speak, the new base level is our new base.

So we are being very conservative going into next year and that new base is reflected in the numbers you see.

Great.

And then I hate to beat a dead horse here, but going back to consolidation, and if you look at what labels are potentially going forward or not going forward in the new May Federated combination, we've seen some pretty aggressive discounting of a couple of your labels through the May doors.

So I was just wondering if you could give us a little color by label what we should see go forward.

Well, thery're still developing their strategy.

That aside, Michael Kors is finished.

But after that, all of our labels are going forward.

The question is going to be, to what degree and where.

We're hoping that some of the labels that were in May that (technical difficulty) Federated to the same extent will be rolled out and backfilled and certain labels might be pared down a bit.

But either way, at the moment we have concern as we should, but the moment, we're feeling very good about our efforts and what Federated is sharing with us.

Last question, Arrow at Sears.

I think that we heard VF and Carters comment on the Sears business as well as some others.

Would you care to comment on what's going on there from your front?

Sure.

Yes, our Sears business is -- we've planned it very tight.

We planned inventories very tight there, so we have been on plan with Sears from the beginning of the year.

That trend has continued.

So we've been -- our business has been right where it should be, sell throughs, particularly on the dress shirt side of the business has been very good, and the sportswear business has been on plan with their planning process.

So we have not had any disappointments in the Sears business with Arrow.

Thanks very much.

Congrats on a great quarter.

(OPERATOR INSTRUCTIONS).

Andrew Byrd with Post Advisory Group.

Just a couple of quick balance sheet questions.

In cash flow.

Can you tell me what CapEx was in the quarter, and also, I don't believe you guys have touched the revolver, what your availability would be under that I believe just get a borrowing bid to it?

Well, our total revolver is $325 million.

We have not borrowed against that amount at all as a borrowing rate and a high point.

We use that line for letters of credit, our high point is about $175 million.

So there's more than enough availabilities at the high point of the borrowing on the use for letters of credit.

Be -- there's an availability in addition of at least $150 million.

In addition, your question on CapEx for the quarter, somebody is just looking at the number.

But it looks like CapEx for the quarter was about $25 million.

Okay, and was that -- did you see that 175 in LCs in this quarter?

The LCs was in -- second-quarter was the high point for LCs.

Was the end of the second-quarter, so there was about 150 during the quarter on average.

150 during the second quarter.

Can you tell me where it ended at the end of this quarter?

About 150.

(OPERATOR INSTRUCTIONS).

Margaret Mager.

Goldman Sachs.

I can remember when there were two people asking questions on your conference call.

You are always one of them, Margaret.

I have a couple of questions.

First of all, is there anything in your business that's down or is everything trending up right now?

We struggled with Bass in the early part of the year.

Bass retail.

That number for the year was down.

It's been more than made up for by the balance of our retail brands; but as I said earlier, the Bass brand in September started to come around.

And we've been pretty -- we're very pleased with the business in the third quarter.

It was also pointed out that the Calvin Klein women's business has been a disappointment.

We have shared -- we've discussed at every conference call, but as we said to you, we feel pretty good about the go forward, but (indiscernible) would have to execute and we have protection and then as I said, our royalties and advertising.

Short of that, Michael Kors of course was a disappointment to us.

It was very small.

We were their dress shirt licensees.

In fact, we've positioned ours -- we had the positioning in dress shirts we're looking for.

It's just the whole brand didn't deliver what it was supposed to.

Short of that, there's no negatives in the Company.

I guess I find it a little challenging to reconcile that with everything that we're hearing about some of the department store channel long -- the idea of their desire to improve turnover and so, focused on reducing receipts and driving turns.

Also, the consolidation of May and Federated and the closing of approximately 80 stores.

I don't -- and then just the fact that the same-store sales in the channel distribution are not really that good.

So I just don't really understand it.

How can you be completely immune?

Well, we're not immune.

To all of this -- well it seems like it just because your --

Margaret, we're not immune.

We have many sleepless nights dealing with the issues that are confronting our industry today.

However, while they may not want to buy as many dress shirts as they did last year in terms of inventory, they are getting their sales and they're asking for fill ins and we're doing it.

In the case of sportswear, we get our projections early in.

The goods go in, and I assure you if they stop selling, we get all kinds of backlogs and cancellations as the norm.

But our goods are performing and we continue to get our orders filled.

We are -- I don't know more than that what to tell you.

The numbers are the numbers.

If you were to inquire of your retail friends how we are performing, I think they would tell you that we are outperforming most.

I have one statistic that would tell you if you look at dress shirt businesses in former May company, you would see that their overall dress shirt department was up, but our dress shirt brands was -- the increases were twice the number that were up, so we've pretty much carried a lot of the load in May company in terms of their dress shirt performance.

So that's the best I can do, and of all the new launches that were launched in men's sportswear last year, and there were a number of them, we said we were most confident that Calvin Klein would prevail, and once again, we are prevailing.

Calvin Klein is performing at or better than planned and people are very pleased.

I have seen the Calvin Klein and the positioning is really excellent in the stores.

It's just the ability to completely overcome all of the challenges of the channel that I find really striking.

Well, if we were talking about a year out, a year out we would tell you things are going to be great, I would understand your concerned, but we're delivering -- right now, we're delivering what we're saying.

It's there.

You know, you talk about how much business you do in the off-price channel, even in a conceptual way and what's the trend in with that -- with those folks, the T. J., Ross, etc. of the world.

There is one secret to the off-price channel.

Don't have surplus.

If you can control your surpluses at a minimum and you are careful on what you have to put out in that market, it can be a very profitable channel, but if you get in trouble, look out.

Our history has always been to focus on inventory management.

There are very few things in our corporation that you can get in trouble for, but the number one item that you can look for trouble at PVH is inventory.

We are very, very careful about the way we manage it.

And having said that, when you're not in trouble with inventory, the offprice channel can be a very good channel for you, and that's exactly how we approach it.

Is it substantial -- is it a meaningful amount or are we talking a 1, 2% kind of channel for you?

Well, it's not 1 to 2%, Margaret.

We've always talked about that discount channels, including planned sales where we sell to some private label dress shirts or whatever through some of the discounters and through some of the mass merchants, represents between 8 and 10% of our volume.

It's not a channel distribution we're growing at all, but it represents about 8% of our volume overall.

And it's there for the most part to take care of problem goods, but it's also there to keep our flows goods balanced so we don't ourselves into trouble.

Okay.

A couple more questions just on the Federated situation.

Can you quantify how much sales are going to go away from the store closers?

A number of the other VIN (ph) suppliers have given numbers.

Sure.

The annual effect for both our wholesale dress shirts and our wholesale sportswear is somewhere between 12 and $16 million, depending on the number of doors that are either closing or some doors that are changing over.

Our Bloomingdale's stores that we have some business with but obviously much smaller than we have with some of the other stores.

Okay, that's helpful.

And then just thinking ahead of it, Lord & Taylor.

Do you do any business with that chain?

And just in case the decision ends up being made to tag the whole idea and maybe divest in real estate.

And who knows?

I don't have a beeline there, but I just wanted to know how much business you do with them.

Right now, we do about $5 million with Lord & Taylor; it's pretty much the Calvin Klein brand.

So it's de minimus really.

Okay.

Well, you know, as you said, Mark, your numbers speak for themselves and your numbers are very, very good, so all of the best.

Talk to you soon.

Carla Casella.

J.P. Morgan.

Hi just follow up on the CapEx number.

That sounded high, I'm wondering if that included the earnouts of Calvin Klein or if that was a separate number.

I apologize. 25 million is the year-to-date capital expenditure.

Great.

And then the earnout payment?

Excuse me?

How much was the earnout to Calvin Klein this quarter?

This quarter, we are now approximately $6.5 million.

How much?

$6.5 million which is right on target for the year.

We're expecting about 25 to 26 million.

Great.

Thank you.

Susan Stansbury with Miller Tabak.

Yes, since you brought up inventories, I don't even remember what the aggregate quarter to quarter change was which means it was probably in line with expectations but -- or my expectations or it wasn't alarming, but can you parse retail versus wholesale?

Retail meaning outlet stores versus wholesale?

Susan, the inventory is up for the quarter -- 8% quarter to quarter last year.

We're planning an 11, 12% sales increase in the fourth-quarter, so I think it's right in line.

On a retail basis, when assuming you mean our retail stores.

We are -- we're basically flat with last year because our number of stores are relatively flat, and the growth that we have planned is really -- in inventory is really to support the wholesale sales increases that are being planned for the fourth-quarter and the beginning of first-quarter which -- the inventory is very clean.

And the way we look at our business is, we also look at the department store inventories and what's there to clear and move.

And our pipeline all the way through route is very, very planned.

So that's what gives us comfort going into the fourth-quarter getting ready for the holidays.

Sounds good.

Thanks ever so much.

Operator, I guess with that it's now 12:00.

We're going to have to cut this.

Maybe take one more question and then cut this off at this point in time.

Mr. Weber, actually, there are no further questions.

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

Sure to thank you very much.

I used to work with a gentleman on our Company who used to always say to us Mark, Bruce at the time, listen, it's okay to be confident not cocky.

I want to make sure you understand, particularly Margaret's question, we're not being cocky.

Our numbers speak for themselves.

We are executing very well.

We feel very strongly about our strategy.

We feel very good about the brands we're managing, and we feel very good about the people that are managing those brands.

We are counter to some of the trend.

We are benefiting from the fruits of our labors.

But I kid you not, that every day that goes by, we don't have grave concerns about these acquisitions, these mergers, and the challenges being put forth in our industry.

Having said that, we are confident in the team, we're thrilled with the quarter, we feel very good about the balance of the year, and we look forward to executing and talking to you on the next call.

With that, thank you very much.

That does conclude today's conference call.