PVH Corp (PVH) 2006 Q1 法說會逐字稿

Good day, everyone, and welcome to today's Phillips-Van Heusen Corporation's first quarter 2006 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 copywrited material.

It 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 and statements you make appear on any transcript or broadcast of this call.

The information made available on this webcast and conference call contains certain forward-looking statements, which reflect PVH's view of future events and financial performance as of May 23rd, 2006.

Any such forward-looking statements are subject to risk 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 www.PVH.com, and in the Company's current report on Form 8K furnished to the SEC in advance of this webcast and call.

At this time, I would like to urn turn the call over to Mr. Emanuel Chirico, Chief Executive Officer.

Please go ahead.

Thank you very much.

Good morning, everyone.

First let me start by saying we are quite happy with the results of our first quarter.

Earnings for the quarter were up over 70% over last year.

All of our business units exceeded their sales and earnings plans for the quarter.

That momentum has continued into the second quarter, and gives us great confidence that we can meet or in fact exceed our updated earnings guidance for the year.

We believe that there is significant opportunity in the second half of the year to outperform our business plan, if the current trends in our business were to continue.

Let me take a couple of moments, and just talk about each of our business units and we'll start with the Calvin Klein.

All of our licensing businesses are running on or ahead of plan.

We have seen particularly strong results in our fragrance business, driven by the continued strong performance of Euphoria, just to remind everyone, Euphoria was launched in the second half of last year.

We're planning a follow-up launch of Euphoria Men's beginning with the holiday season 2006, so we think that our fragrance business will continue to perform very strongly.

In addition to the strong revenue performance in fragrance, we're anticipating a very significant increase in the marketing of the Calvin Klein brand under the fragrance label.

Cody is committed to spend over $85 million marketing the fragrance business in 2006.

That's about 10 to $12 million higher than what we spent last year.

We have also seen very strong performance in a number of our Calvin Klein women's businesses this year, particularly women's suits, women's footwear, handbags and accessories.

Those businesses, the women's suit business launched in the fourth quarter of 2005, sell-throughs have been extraordinary, particularly at Federated.

There has been significant reordering going on in that business, and we're really, that business is really outperforming all of our plans as well.

Moving on to our Sportswear business, I am going to start with our Calvin Klein men's better business there.

That business continues to outperform the competition.

It is performing exceedingly well, particularly at Federated.

We've seen very strong sell-throughs at regular price, and consistent growth in comp store sales on a door-by-door basis.

We're currently operating just over 500 doors, and all I can say about this business, the Calvin Klein men's sportswear business is that it continues to exceed our plans and expectations as we go forward.

Our Classification Sportswear businesses, IZOD, Arrow, and Van Heusen, also continue to have strong performance in their respective channels of distribution.

We continue to outperform the competition at retail and have experienced significant sell-throughs, which have significantly benefited our gross margin rates in the quarter.

We have on hand significantly less clearance merchandise at this point this time this year than last year, and we believe that's going to benefit our gross margins, as we go into the second quarter as well.

Moving on to our dress shirt business, the performance there is doing, we're doing very well at retail.

We're run ahead of our business plan at this point.

In department stores, our designer brands are really driving our performance, particularly Calvin Klein, Kenneth Cole, and Geoffrey Beene.

While in the mid-tier, Arrow and Chaps continues to drive that business.

We are having comp store increases, and we're also increasing doors in that mid-tier, particularly with Kohl's.

Moving on to our outlet retail business, we had an outstanding quarter at retail there.

We posted a 6% comp store increase, besides putting on a significant increase in sales, we delivered significant gross margin improvement, driven by more full priced selling, and significantly less clearance merchandise, which we think will also benefit the future as we go forward.

Finally, I would just like to comment on our secondary offering of our stock, our partners Apax converted their shares immediately following the end of the first quarter, at the beginning of the second quarter.

We had a secondary offering of our stock.

We were very happy with the execution of that offering.

While we did not receive any proceeds from the offering, we have strengthened our balance sheet, enhanced the liquidity of our stock, broadened our investor base, and will improve our overall cash flow going forward.

We think it is a very positive cash flow, a positive transaction for us, and will position us to really be in a very good position, to take advantage of any business opportunities that might exist in the second half of the year.

With that, I would like the turn it over to Mike Shaffer to help quantify some of what I said.

Thanks, Manny.

Good morning.

As Manny said, we're pleased with our first quarter results.

Total revenues were 7% in the first quarter to 506 million.

Contributing to this growth was the continued roll-out of Calvin Klein sportswear, which added the strong performance in IZOD, Arrow, and Van Heusen sportswear.

Our retail business had a strong quarter with comp increases of 6%, and our licensing revenues including Calvin Klein were 7% ahead of last year.

EBIT for the quarter increased 50% over the prior year to 72 million, while EBIT margin improved 400 basis points in the quarter to 14.1%.

This increase was driven by strong revenue growth, a 350 basis point improvement in gross margin, and the continued leveraging of our expenses.

Our gross margin improvement was driven by strong sell-throughs at retail leading to more full-priced selling in our wholesale and retail divisions.

Also fueling the growth in earnings per share was a 30% reduction in net interest expense, as a result of our net debt position, which improved 178 million versus the prior year.

Earnings per share increased 76% to $0.74 per share, and was $0.01 to $0.02 ahead of our updated previous guidance.

From a balance sheet perspective, we ended the quarter with 305 million in cash, and our inventories are very clean, and basically flat to last year levels.

For the full year, we're projecting free cash flow of 125 to 130 million, with our year end cash balance at approximately 400 million.

Looking forward, we are projecting second quarter earnings of $0.46 to $0.47 per share, which represents an 18 to 21% increase over the prior year, with corresponding revenues of 455 million, which is an increase of 3% over the prior year.

For the year, we're raising our 2006 earnings per share guidance to a range of $2.32 to $2.37, which represents an increase of about 25% over last year, with corresponding revenues of 1.97 to 1.985 billion, or an increase of approximately 3 to 4% over last year.

We continue to maintain a conservative view for the third and fourth quarter.

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

As Manny said earlier, we completed the secondary offering of Apax's stock after the first quarter ended.

While yielding us no cash proceeds, this transaction further strengthened our balance sheet.

All of the Apax preferred stock has been converted to common stock.

The preferred stock was the most expensive component of our capital structure, carrying an 8% nondeductible dividend.

On an annualized basis, the elimination of the preferred stock yielded us a cash flow benefit of approximately $11 million, which will begin benefiting us in the second quarter of this year.

With that, we'll open it up for questions.

Thank you. [OPERATOR INSTRUCTIONS] We'll take our first question from Jeff Klinefelter with Piper Jaffray.

Congratulations, everyone, on a great start to the year.

Thanks.

Wanted to ask a couple more questions about the CK men's business first of all.

You referenced, Manny, that Federated doors have been very strong for that brand for the business.

Could you talk a little bit more about specifically the trends there, year-over-year, in terms of what are the productivity improvements that you're seeing in those doors, and how does that compare to the balance of your distribution, and then remind us again on what your distribution expansion strategy is going forward, potential new doors, maybe that you have announced, and ultimately how big a distribution would you like to see CK men's have over the next year or two?

Let me start with, we've seen double-digit comp door percentage increases in the men's business on a door-by-door basis.

We've seen really strong sell-throughs and higher gross margins with Federated, with Dillard's, and with some of our other retail partners as well.

We ended last year with just about 500 doors.

We're anticipating that we'll open net this year with some of the Federated closings, with about 560 doors we'll end the year with.

We believe that the business opportunities for the men's sportswear business over the next three years is something around 200 to $250 million in wholesale sales.

Last year we did a little bit over $50 million.

We're targeting this year to do closer to 85 to 90, so it gives you a sense of where we are on the growth at this stage.

Besides seeing door expansion, we're also seeing shop size expansion in existing doors, given the strong performance, both on a sales per square foot basis and average unit retail out the door, which in the fourth quarter and first quarter of this year were the highest for Federated.

That business continues to expand in those stores.

We think there continues to be a lot of growth opportunity in that business over the next three years.

Taking a step back from just the CK men's business and thinking about the overall growth of both sportswear and licensing, your outmargins have expanded significantly over the last few years, and given that licensing continues to grow, or royalty business continues to grow faster than overall apparel, ultimately what do you see as a reasonable target for outmargins over the next few years, how high could this go given the strength of licensing?

We've been consistently beating our targets.

Our targets are, if we grow our top line around 5% overall, that we would add somewhere around 75 to 90 basis points of operating income margin in the year.

We've been exceeding that over the last few years, basically because we've been able to drive the top line faster.

The way the business model works, particularly on the licensing side, the leverage you get on the operating expenses, it is a great business model, very cash-flow positive, and you're able to get a significant leverage on the operating expenses, in order to grow your operating margins significantly faster.

So what we're targeting this year is about a 90 basis point improvement, and as we look out, anywhere from 75 to 90 basis points over the next three years.

And just one last question on retail, retail continues to perform well and ahead of plan.

Any plans outside of adding CK retail doors, any other plans to start growing that business again, in terms of the number of new doors?

Well, I think in the outlet channel, we're going to continue to be very prudent about how we open those doors.

We believe that the channel is significantly improved from where it was two years ago.

I think you see it in our outperformance, but you also see it in the channel performance.

In addition we'll continue to look at appropriate doors to add, but we don't view that outlet business as one of our driving growth vehicles for us.

We'll grow with our comp store expansion, and a continued roll out of the Calvin Klein business at this point.

Great.

Thank you.

Our next question is from Bob Drbul with Lehman Brothers.

In terms of the opportunities that you have in the back half of the year, Manny, could you point to one or two of the biggest opportunities that you see for the rest of this year?

Sure.

The biggest opportunity is by far Calvin Klein.

A number we're planning conservatively for the existing licensing businesses that exist today, we plan those in the 2% range for growth.

They've been exceeding that over the last few years, so if the performance is better second half of the year, that will drop to the bottom line.

We think a number of the new launches, particularly men's and women's bridge sportswear in Europe, that will launch beginning in June of this year.

Some of the international jeans business that Warnaco has taken over, particularly in Europe, but also in Asia, we believe that there is significant opportunity above that plan.

The fragrance business with Calvin Klein we're focusing on this year continues to be a real opportunity for us.

Euphoria and our CK One businesses are exceeding their plans and sell-throughs.

The Euphoria women's business really has outperformed all of our plans, and we're very optimistic about what the men's business might mean for us going forward.

We think there is a real opportunity there.

The second half of the year we think what Warnaco is doing with their underwear business, that there is real opportunity there, particularly internationally.

And I guess near term and coming out of the first quarter into the second quarter, on your outlet business have you seen any traffic changes with the $3 gasoline, or any macro issues that you're really concerned about with the fundamental performance of the business?

We haven't seen any changes.

The comp store performance is still around 5%, but concerns, yes.

It is just a thing we have to be very close to.

Inventory is very clean.

We think we're in a great position.

We haven't seen any slow down, and there is if you talk to most of the outlet landlords, they will tell you they think they're going to perform better in this environment, because as consumers are looking for value, they're going to take the day to travel, because there is great brands available in the outlet channel, and the consumers use it as a shopping experience to go and actually spend money, not to just go and browse, so I think, we haven't seen a slow down, gas prices haven't been an issue, and what's usually driven the outlet business, particularly for us in the second and third quarter has been more about vacations, and how people are booking their travel domestically.

Given the weakness of the dollar, especially with the Euro, every report I have seen has pointed to strong domestic travel in the United States, vacations closer to home in the United States, and that usually bodes well for us, as we go into the second and third quarter.

We're optimistic about how that business performs, but we're planning the business conservatively at about a 2% comp store increase, if we capture the top line better than what we're anticipating, obviously it will drop to the bottom line.

One final question.

Maybe Manny for you or Mike, is with the cash balance that you ended the third quarter with, and the expectations for around 400 million for the year, can you give us an update, in terms of thoughts around an acquisition, or the timing, or a buyback program you might consider?

I think it is a little premature to be talking about a buyback or debt buyback or stock buyback at this particular moment.

Our priority for the cash would be first to use it for an acquisition, the criteria for acquisitions hasn't changed.

Strong brands that we could layer onto our infrastructure, and take it to a specific channel distribution, and capitalize on the strength of that brand with our infrastructure is really what we're looking for, our first priority.

However, if we do end the year as we're projecting with over $400 million in cash on the balance sheet, I've been pretty consistent saying we're not a bank.

We're not about holding our cash to just earn 3 or 4% interest.

We would look at our capital structure, and the potential for a stock buyback, or debt buyback, or something of that, we would attack our balance sheet and our capital structure, in order to be, to deliver value to our shareholders.

The businesses are very cash flow positive.

Over the next three years we're going to generate well over $500 million in cash.

Great.

Okay.

Thanks.

Congratulations.

Thank you.

Our next question comes from Margaret Mager with Goldman Sachs.

Hi, Margaret.

How are you.

I have a couple things I want to ask you.

Can you talk a little bit about your classification sportswear business, what rate is that growing at now, and are all three IZOD, Arrow, and PVH all growing at this juncture, and could you also talk about the strategy for those brands, like what are you doing?

I know you're saying that your full-price sell-throughs are good, et cetera, but when you sit down with your heads of these businesses, they must have strategies and opportunities that they're pursuing.

Can you outline those in a little bit more depth, like is it price, is it quality, is it color, is it expansion of SKUs, contraction of SKUs, some more depth around exactly what your strategy in these businesses.

Each business has a different strategy.

I guess let me first start with the Arrow and IZOD businesses are growing in the high-single digit range.

The Van Heusen business is growing in the low-single digit range.

The Arrow business is being driven by the strength of in the mid-tier, particularly with Kohl's, and the continued roll out of their doors.

For Arrow, it has been all about lateralizing the product across the store, taking woven sportswear, expanding in knits, expanding in bottoms, both shorts and khakis.

We have expanded the product offerings in the mid-tier, and that's been very successful for us.

It is a great value equation, particularly with the launch of Chaps.

It gives Arrow's price position even more credibility at Kohl's.

The Chaps retail prices are marked to go out the door anywhere from 4 to $6 higher than the Arrow price positioning, so Arrow really has a great proposition for the consumer.

The IZOD business has just been strong across the board.

It is a great brand.

We've lateralized the brand consistently across.

It is very important to Federated.

It has been a lateralization story there as well, and we continue to add categories in sportswear.

It use the to be a very much spring driven business.

It is now a year-round business.

That business keeps focusing on it.

We've been making over the last three years significant investments in marketing those main four brands.

Compared to the competition, the amount of dollars we spend marketing Van Heusen, IZOD, and with the acquisition of the Arrow brand at the end of 2004, we substantially are spending more than our competition on the main floor.

I think that's all benefiting the brand and how we're doing, and I guess the last thing, when I meet with our heads of our businesses, with the focus on growing the business, but the focus is also on managing the markdowns.

We spend a ton of dollars investing both in marketing coordinators, merchandising coordinators in the field, sales analysts and sales specialists that we're out in the stores, and we're making the investment in that personnel to help drive our full-price selling.

That strategy has worked over the last fifteen months for us, and it continues to work into the first quarter.

That's helpful, Manny.

Thanks.

I also wanted to ask about follow-up on the retail expansion question.

Can you just outline, you know, the number of stores that you have now, and how the Calvin Klein segment fits into the overall retail picture, as far as store counts and expansion plans?

Sure.

We're operating about 60 Calvin Klein stores today, just to put that into perspective, I think Ralph Lauren operates about 140 stores.

Tommy and Nautica are probably close to that as well.

We believe there is opportunity.

We've targeted as an optimal number for us in the short-term, meaning the next two to three years, somewhere around 90 doors for Calvin.

There may be opportunity to be more than those doors, but right now that's our plan.

We want to stay in the best outlet centers, the A and B+ centers.

We don't want to go into some tertiary centers yet.

We think the brand is working every where.

On a sales per square foot basis, the Calvin stores are exceeding all of our expectations.

We're doing well over $450 in sales per square foot.

That's in a new roll-out business.

Our comp store performance has also been in the high mid-single digit range as well, so as people realize that Calvin is in the center, because most of the stores we open are backfills, so it is a great brand, but once people realize it is there, you really do get comp store growth, significant comp store growth in those doors as the consumer realizes it.

That is a very profitable business for us.

It works very well for us, and we think the opportunity is over the next two to three years to be in 90 doors.

We operate in the balance of our chain, the other four brands about 600 doors.

Obviously more in Van Heusen and Bass, and less in IZOD and Geoffrey Beene, and those businesses are all performing, as I said, about plus 6% comp with the low being plus 4, and the high being about plus 8 or 9, so we're just very happy with the performance in that channel.

Yes.

Everything seems to be going very, very well, and I will come on with a follow-up if there is time at the end.

Thank you.

You're welcome.

We'll take our next question from Liz Dunn with Prudential.

Hi.

Let me add my congratulations.

In terms of acquisitions, can you give us some parameters around how large an acquisition you might contemplate, would you feel comfortable using stock, the sell-off today is a little disappointing.

You still have a healthy multiple, relative to some of the competitors.

Would you consider using stock, and now that your balance sheet is a little bit cleaned up with the conversion of the convert, does that give you a little bit more flexibility?

Can you give us more detail on acquisitions?

Sure.

Yes.

You know, as far as price range, it is really will depend what asset we're talking about.

There is two types of transactions.

There would be a very large one, and that will determine that you could potentially be buying an acquisition that has multiple brands, or multiple operations, and that type of acquisition will determine its value as appropriate.

More of the type of acquisitions we've been talking about are bolt-on type of acquisitions, are branded business that's not optimizing the strength of its brand, as we've done with Arrow, IZOD, and Calvin Klein, to layer those onto our businesses.

I would imagine when you look at the valuations of those types of businesses depending on their size, that could be anywhere from a $50 million acquisition to a 250 to $300 million acquisition.

For that size of a deal, given our strong balance sheet, our excess cash position, clearly I think the opportunity would be to use our cash balance, potentially use some level of debt, I think if you look at our balance sheet, we're significantly under leveraged overall, on a net debt position at the end of the year.

Our net debt position would be zero, so I think there is clearly opportunity to leverage the balance sheet, which would make any transaction even that much more accretive.

For a larger transaction, clearly we would be willing to use our stock as a currency.

We think that there is tremendous growth still obviously in our stock.

We're disappointed with how it is performing this morning, given the great results but who can figure that, the short-term ups and downs.

Overall, yes, to answer your question, we would be willing to use stock for the right acquisition.

Okay.

Then just one follow-up, would you ever consider doing a hostile transaction?

I don't think those type of transactions necessarily work, particularly in the industry that we're in.

This industry is driven by usually by strong management, and I don't think it necessarily works for anyone, to think even about doing hostile takeovers.

Thank you and congratulations again.

Thank you.

[OPERATOR INSTRUCTIONS] Our next question comes from Jennifer Black with Jennifer Black and Associates.

Good morning and let me add my congratulations.

I wanted to know if you had any comments about Calvin Klein cosmetics.

Sure.

Calvin Klein, we signed a license agreement about six, nine months ago.

The plan is to launch color cosmetics under the Calvin Klein label in the United States, in the first quarter of 2007, probably start shipping beginning in January.

We think we have a great partner in a company called [Mark quin].

We're developing a strategy with Federated to open initially between 150 and 250 doors.

We believe there is a great business opportunity from a royalty point of view, but in addition it is also a great brand image builder.

Cosmetics like fragrance overspend from a marketing point of view, it is a very high margin business.

It has great positioning in the stores, and we think it will only enhance the Calvin Klein label, and the Calvin Klein brand going forward.

We're excited about it.

We're working very closely with Federated on rolling that strategy out in the United States.

That would be followed up in the second half of 2007 with an international roll-out, and these plans are all being worked on, both the business plans and the marketing plans that to go along with that.

We will have more to say about that as the year progresses.

It is an exciting business opportunity.

Manny, do you have any thoughts as to how large of a business that could be?

We think in the United States, you know, we believe the potential would be at wholesale 150 to $200 million business over a number of years.

Internationally, a similar sized business.

It would be a nice sized business, but as I said, one of the big benefits would also be just the brand building that it would create as well.

Right.

All right.

Good luck.

Congratulations!

Thank you.

We'll take our next question from Omar Saad with Credit Suisse.

Thanks.

Good morning.

Wanted to ask a question specifically on the Calvin Klein licensing business.

The top line there I think grew 5% in the quarter.

I wanted to get a feel with a lot of the launches you talked about in response to an earlier question, where do you see that growth being the top line growth in that business, coming out over the rest of the year?

We're consistent.

That business should grow for the year somewhere around 9 to 11%.

Some of what's gone on in the first quarter, I think you realize in the licensing revenues, licensing and other revenues, it includes advertising revenues, so some of that is just being driven.

I think the segment is up about 5% for the quarter, but some of that is really just being driven by significant advertised spend last year on special projects, particularly with the Euphoria launch last year, we were doing a lot of production costs, so we had significant revenues coming in from our licensing partner to build up the marketing, and the commercials that went with the launch of Euphoria, and it really was a wash on the expense line, so if you were to take that up, we were up closer to 7.5 to 8% overall.

That business is tracking exactly where we feel, and it should grow about 9 to 11% for the year.

Great.

A broader question, if you look at your brands and your businesses, you kind of operate in a bunch of different channels, across price points.

What's your sense of what's happening at retail these days, and how strong the consumer is, and there is so many questions out there with inflation and interest rates and when you look at your portfolio businesses, and what you're seeing out there, how do you feel about the overall environment, and especially what you're seeing kind of -- what you're seeing most recently since the quarter end?

I am going to just talk about the outlet business, and then I am going to turn it over to Allen to talk about the third-party business.

He is much closer to it, Allen Sirkin, our President.

The outlet business, as I said, the business has really continued at about plus 5% going in May.

We feel good about that business.

We continue to watch it.

May is probably the smallest month obviously of the second quarter, as we get into the vacation season, June and July are much bigger.

We'll continue to monitor that, and keep you posted on it.

It feels good.

From a third party point of view, Allen will talk about it.

From a third party perspective, obviously the market is in a significant degree of transition.

Consolidation, door closures, refocusing of assortments, one of our strengths is that our multiple brand, multiple channel strategy, has provided us with a deep penetration and participation with all major customers.

Our field force, as Manny mentioned before, really has us connected with what's going on.

We do believe that there will be some shifts in consumer focus and attention.

We're seeing some momentum in the mid-channel play, particularly around the moderate brands.

We think that customers will find their way through the new assortments, and connect with the customers who present the brands they want to buy best.

Our strength in department stores is our better brand selection, our Calvin, Geoffrey Beene, Kenneth Cole, our niche brands all position us well.

Our moderate brands, Van Heusen, Arrow, Chaps, and dress shirts, and certainly IZOD, in sportswear, and in all of those other brands, have us positioned extremely well to deal with the consumer shifts and moves.

The decision of the consumer is going to be driven by the assortment of the retailer.

Federated is heavying up on private label, and we are a good complement to that strategy.

We feel good about our progress with them so far through the transition, and where their customers settle in, we'll settle in with them.

It is about connecting with the consumer, though, and we think our strategy works.

Great.

If I could follow up, Allen on the concept for the retailers really beginning to push private brand and private label more than perhaps they have in the past, both in places like Federated, as well in the moderate channels, what's your sense, your knowledge and information about that, those consumers and those channels, how important are brands versus private brands to them, and where do you fall out on it?

I obviously have a bias.

Our strategy as a Corporation has been about building brands and connecting with consumers.

Every brand that we have has some sort of a history, a connection.

It stands and represents some quality fashion value equation, over the test of time.

We think when a customer picks up a branded product they know exactly what it represents, and it is somewhat like a good friend, once you connect with a brand, and it connects with your lifestyle, you tend to stay with it.

That's where the marketing comes in, the reinforcing of the brand positioning, the connection with the consumer, and last but not least, probably most important is outstanding product that people want to buy, product that's trend right, and appropriate for their end use.

Okay.

Great.

Thanks.

Appreciate it.

Great job.

Good luck.

Thank you.

We'll take our next question from Susan Sansbury with Miller Tabak.

Yes, thank you.

I think most of my questions have been asked, but inventories, are they too lean?

Your prior commentary suggests there hasn't been any [sea] change, in terms of orders, cancellations, consumer take away, so is it, are inventories too lean or is this just, they're so clean and there is somewhat, there isn't any excess inventory here, is that really what I am looking at?

I guess there are two things, Susan.

We're very confident, the inventory is very lean, and appropriate to do the sales in the second quarter.

Just to remind everyone, last year at the end of the last year's first quarter through the second quarter with what was going on in China, and the Far East last year, we accelerated about $15 million of inventory into the first quarter and second quarter last year, so our inventories last year were probably $15 million higher, so on an apples-to-apples basis, if you really wanted to be optimal last year, we would have been $15 million less, and that would put us I guess, around 5% up year-over-year, and I think that's very appropriate to do the sales we're talking about going forward.

So we're very comfortable from an inventory point of view, and we think in this environment with the chaos that we think is going to be going on at retail, particularly with a number of store closings that's going to occur, and promotions around that, the best position you could be is to be very clean, and with our dress shirt business just to say, the one part of our business which is really driven by a big 85% of it is replenishment, and the [op side] of the business, that business is clearly we back up and can get back in in very short timeframes, so if business picks up, we'll be able to capture it.

Great.

That's very helpful.

I wish we could convince the sellers in the market place that everything is fine, but as you say, it is just one of those things.

Thanks again.

Thank you. [OPERATOR INSTRUCTIONS] We'll take our next question from David Glick with Buckingham Research.

Good morning.

Congratulations.

Hi, David.

Manny, you mentioned there is a second half opportunity potentially to beat guidance if your current trends continue.

Do you have that same view about the second quarter, is the second quarter guidance as conservative as your second half guidance?

Obviously not.

The second half is planned up, I think, just about 10%, and second quarter is planned up almost 20%, the earnings per share, so it is not as conservative as the second half, and that's because the orders, the retail business that we see is right in front of us.

We're planning comps in the second quarter at about plus 2.5, 3%, and we're planning comps in the second half at about plus 1.5%.

Just to give you a sense in that business, so we believe trends continue, and we can do better in all of our quarters, but clearly the biggest opportunity for us, is the second half of the year against our current guidance.

Okay.

Great.

Just a follow-up question.

I was wondering if you could commented on your IZOD positioning with JC Penney.

They clearly want to expand doors.

At the same time, your business is very good at Federated with IZOD.

How can you continue to finesse that distribution strategy?

Can you sustain that positioning over the long-term?

We believe that IZOD, this is Allen.

We believe that IZOD is a very strong consumer brand.

We have shared brands across powerful customers before, and done it in a healthy format for both.

Fundamental to that is appropriate sizing, presentation for each customer, as much customization in the assortment as possible.

We have a fair amount of specific product to each one of those customers in the core assortment, and we feel comfortable that both customers can endure and survive and prosper.

Season-to-date both of those major partners are enjoying significant upside performance, and I think the world is big enough to handle the cross channel marketing with a powerful brand.

You're not concerned at all about your positioning at Federated?

I think we always are respectful of our relationships with all of our partners, trying to align our strategy.

Everyone in the world would like exclusives.

It is not the best strategy for dominant consumer brands, to put all of your eggs in one basket, one way or the other.

Thanks, Allen.

Thank you.

We'll take our next question from Melissa Otto with Decision Economics Investment Research.

Congratulations on a great quarter!

Most of my questions have been answered, but just would like to get a little bit more color on your expectations around denim trends in Europe, and in Asia, just curious if you're seeing or hearing anything compelling out there?

You know, this question comes, I guess now this is the third year.

Last year was denim glut, the number of issues.

The denim business is very healthy.

Our international denim business is very underdeveloped with Calvin Klein, and our licensing partner there, so we think Warnaco is really going to be able to significantly grow that business in Europe, because of their distribution network that they have, internationally that's much more sophisticated and dedicated than what existed in our previous partner, and in Asia because the brand strength just continues to grow the roll-out of Calvin Klein Jeans stores continue, so we view Europe and Asia as a tremendous growth vehicle for us.

The Calvin Klein men's business in the United States in the status denim area, we have the #1 positioning in men's and the #3 positioning in women's.

They're doing, those businesses are performing right on plan.

The plan was for it to be flat to slightly down in the first half of the year, given some of the vagaries that Warnaco is going through, and some of the distribution issues, particularly with department stores with closed doors with Federated.

They're managing through that, and that business for us is right on-plan where we expect it to be, and we haven't seen in our own stores any type of slow-down in denim at all.

The business continues to perform, and we're not as directly exposed to the denim area, except in the licensing business, as some of the other players.

Great.

Thank you very much, and once again congratulations.

Thanks.

We'll take a follow-up question comes from Margaret Mager with Goldman Sachs.

Manny, when I look at your financials across the course of the year, it looks like the fourth quarter is kind of the biggest opportunity for margin improvement, not so much gross but operating, and I am going to guess it is related to seasonality and mix in the fourth quarter, but is there any, can you just outline can this quarter get to a double-digit EBIT margin, and what would you have to do to make that happen, if it is possible at all?

Thanks.

Margaret, just so I want to make sure I understand the question.

When you said this quarter, you're talking about the fourth quarter?

Correct.

Correct.

You know, like just looking across the financial statements, that's the quarter that has by far the highest SG&A run rate, and the lowest EBIT margin, so what can be done to change that if anything?

The seasonality is just step by step.

Last year that business ran at, we ran at a 9% EBIT margin in the fourth quarter.

The fourth quarter with our January year end, that's a significant clean-up month for us, where we clear all the merchandise.

We mark everything down.

Just by its nature seasonality-wise, it is a big quarter for us to, it is a big quarter for us to clean out, so our margins are under some pressure, and whatever.

It is also tends to be the quarter where we market the most, as we get into the Christmas season, November and December, we're doing a tremendous amount of marketing post-holiday to try and influence the consumer, so by our nature we've always heavied up our marketing in the fourth quarter as well.

That plays a role in it.

Obviously since we're at 9%, we think the target, if not this year will be very close to a 10% EBIT margin this year, and going out.

As the licensing business continues to grow faster than our retail and wholesale businesses, obviously that business will grow as well.

When I look at our businesses, quarters always move the business up and down.

I really like to look at the businesses in halves, and if you look at the business in halves, by far our strongest quarter is the third quarter, particularly because we're setting up for Christmas with our wholesale businesses.

Our licensing partners are doing the same thing, and we get significant margins, and we're almost 13.5 to 14% operating income margins in the third quarter, and then they move down to 9% appropriately, from a seasonality point of view.

I think there is opportunity in the fourth quarter, but I think there is as much opportunity in the third quarter just by the nature of it, so I wouldn't, I am not sure how you particularly have modeled the second half of the year, but the way we look at it, we think there is opportunity that's equal in both quarters.

It is good to know how you think of it, because you're the one that's going to make it happen, not me.

Thanks, Manny.

I appreciate your thoughts.

Good luck in the upcoming quarter and year.

Thank you.

I guess if there is no other questions, --

We do have another follow-up question from Susan Sansbury with Miller Tabak.

Sorry.

I will be quick.

Women's Wear reported that Ralph is taking Polo out of the status denim business.

I assume everybody knew about this.

Does that also mean there is opportunity I guess for the remaining three key brands in status, Calvin Klein, Guess, and DKNY jeans?

The short answer is yes.

I don't have enough information.

I am aware of the article.

I am not sure exactly what it all means.

It is something we're working closely with, Tom Murry, our head of Calvin Klein is working very closely with the Warnaco Group to strategize.

I don't have enough information to really share with you on it at this point.

Okay.

Great.

I will let you go.

Thanks ever so much.

There are no further questions at this time.

Okay.

Again, we look forward to seeing you all on our second quarter conference call.

We feel very strong about the business, and how we see it growing, and we think that there is real opportunity for us to outperform our plan as we go forward, and hopefully our second quarter conference call we'll be able to realize some of that growth.

With that, everyone, have a good day.

Thank you.

That does conclude today's conference call.

We would like to thank you all for your participation.

Have a great day!