PVH Corp (PVH) 2006 Q2 法說會逐字稿

Good day, everyone, and welcome to today's Phillips-Van Heusen Corporation second 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 copyrighted material.

It may not be recorded, reproduced, retransmitted, rebroadcast, downloaded or otherwise used without PVH's express written permission.

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

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

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 statement, 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 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 Manny Chirico, Chief Executive Officer.

Please go ahead, sir.

Thank you very much.

Good morning, everyone.

I'd just like to introduce a few of our participants.

Joining on the call is Allen Sirkin, our President and Chief Operating Officer;

Mike Shaffer, our Chief Financial Officer; and Pam Hootkin, our Treasurer and Vice President in charge of Investor Relations.

I'll start the call by saying we were very happy with the results.

We had an outstanding quarter.

All 4 of our business units performed well ahead of our projections.

I'm going to start my comments with our Calvin Klein business.

The Calvin Klein licensing business in the quarter recorded a 20% increase in royalty revenues.

That was coupled with a 40% increase in operating income.

The drivers of that were really across-the-board.

We experienced growth in all -- with all of our major licensees and in all major product categories.

Some of the particularly strong areas for us were with Coty, in our fragrance business.

That was driven by some of the legacy Calvin Klein businesses.

But in particular, the continued strength and rollout of the women's Euphoria fragrance.

Calvin Klein underwear, our partners at Warnaco had a very strong -- very strong quarter for us.

The rollout of Perfectly Fit, the foundation business that they started last year, has continued very strong, both in the U.S.

And internationally.

As well as 365 for Men, who have had such a strong performance in the U.S., is now going international as well.

The other strong area of performance was with our partner, G3, women's suits and outer wear, which was launched in the first quarter of this year, had just very, very strong sell-throughs at retail, and a number of reorders as we've gone into -- as we've started to book fall.

So that business has been particularly strong for us.

Moving to our retail businesses, we again posted very strong comp store sales increases of about plus 6% in the quarter.

We experienced significantly higher margins at retail.

That was driven by more full price selling.

We had less promotional activity and clearance activity going on in our stores.

And our stores are really just continuing to have great performance for the last 15 months.

On the wholesale side of our business, our sportswear businesses were very strong.

Our legacy IZOD and Arrow businesses continue to post solid sales and margin gains, while our Calvin Klein men's better business experienced double-digit sales increases and very strong profit performance for us.

On the dress shirt side of the business, we also had a strong quarter.

Our results came in well ahead of plan.

I would remind everyone that as we've been saying for about the last 9 months, the first half of our year was being particularly impacted by the door closing associated with the May/Federated merger.

The vast majority of that impact of the merger is behind us as we go into the second half of the year.

And we expect, as we look to the second half of the year, to see solid mid single-digit sales growth posted by our wholesale business as we go forward.

As we look out to the second half of the year, we are very excited by a number of initiatives.

I'll start on Calvin Klein side of the business.

The initial reaction to the new launch of the Kellwood's women's better sportswear product has been very strong.

Initial selling, although it's very early in deliveries, have just occurred over the last 2 weeks have been very promising.

The merchandise and the new shops look great.

If you get a chance, the best place to see it is right at Macy's at Herald Square.

There, there's a 2,500 square foot shop that looks terrific, the product looks great.

Initial selling in the shop has been very strong.

And in addition, to show the support that Federated has given us, we have all of the windows on the Broadway side of the store dressed and laid out with Calvin Klein product.

The doors in fall are increasing for women's sportswear to about 275 doors.

So there seems to be a lot of momentum and turnaround going on in that business.

So we're feeling really good about that portion of the Calvin Klein licensing business.

The other exciting initiative that's going on in the second half of the year is with Coty.

They will be launching, beginning in September, the new men's fragrance under the Euphoria label.

It should be very exciting.

It should really just add to that franchise as we go forward.

We are -- besides some of the new initiatives going on in the licensing side, there's a lot going on at Calvin Klein from a marketing point of view.

Our marketing budgets overall at Calvin Klein between ourselves and our licensing partners for this year is increasing by about $20 million.

Half of that increase is coming from Coty, who is increasing their marketing budgets and their advertising spend, particularly associated with the Euphoria launch by about $10 million.

And then PVH, in combination with our licensing partners, are increasing our buy by about $10 million.

About 70% of that increase will incur -- will occur in the second half of this year.

So although we've been significantly making investments consistently across-the-board at Calvin Klein in marketing, you're going to see a significant heavy-up in the third and fourth quarter of this year associated with the Calvin Klein brand.

At retail, we are planning our retail comps for the second half of the year more conservatively than our business trend.

We're planning them at about plus 2.5% range.

We're doing that because of the general economic environment.

I can tell you through the first 3.5 weeks of August, business has continued very strong.

We continue to comp between 6% and 8% across all of our chains.

So we feel really good about how retail performance has been for us in our own stores.

The initial selling of back-to-school and fall product has been very strong.

Inventories are very clean.

So retail has positioned us in a way, that if they continue to deliver, to outperform the projections that we've put out there.

Our wholesale business is also excellently positioned as we go into the second half of the year.

Inventories could not be cleaner.

We were very deliberate in the first half of the year how we managed our inventories, particularly with what was going on throughout retail and the retail environment in the United States.

We planned our inventories very clean.

We've come out very clean.

And that's bode well, both for our margins in the first half of the year, and as we set up for the second half of the year.

We feel very strong about what's going on with IZOD and Arrow in their respective channels of distribution.

And the Calvin Klein men's business, we continue to believe will have double-digit increases as we go forward.

From a marketing position with our own legacy businesses, we have some substantial marketing increases planned this year for our legacy brands, IZOD, Van Heusen and Arrow.

We're increasing for the year our budgets over last year by about $7.5 million, of which 70% of that increase will come in the second half of the year.

Those are all baked into our numbers and planned out.

But it's showing that as we have very profitable business models, and we're making the investments as we go forward in our brand to really take them to the next level.

We believe that will bode well for the second half of this year as we go into 2007, that although we're dealing with a difficult retail environment to manage our way through at wholesale, we continue to make investments in our brand, and continue to generate above prior year profitability targets.

And with that, I'm going to turn it over to Mike Shaffer to quantify some of what I said.

Thanks, Manny.

And as Manny said, we are pleased with the second quarter results.

Our total revenues were 3% in the second quarter to $459 million.

Fueling this increase was strong performance from our Calvin Klein licensing business, which was 21% ahead of the prior year, driven by revenue growth in the majority of our license fees, with fragrance being particularly strong.

Revenues from our combined wholesale and retail business was 3% ahead of the prior year, driven by our retail comps, which were 6% up for the quarter.

This was a repeat of first quarter results which were also up 6%.

Our wholesale business experienced significant growth in the Calvin Klein sportswear business, partially offset by an anticipated decline in the dress shirt business.

Our dress shirt revenues were better than planned, reflect a decrease to the prior year as a result of the anticipated closures associated with the Federated/May merger.

EBIT margin improved 110 basis points in the quarter to 11.3%.

This increase was driven by a 210 basis point improvement in gross margin, partially offset by a 100 basis point increase in SG&A expenses as a result of the expensing of stock options and additional marketing, as Manny has discussed, associated with the marketing of [inaudible].

Earnings per share for the quarter increased 36% to $0.53 per share, and was ahead of consensus estimate in the top end of our previous guidance by $0.06.

From a balance sheet perspective, cash flow continued to be strong.

We ended the quarter with $368 million in cash, after funding the costs associated with the secondary stock offering.

Our inventories at the end of the second quarter are very clean and on plan with the 2% reduction to the prior year.

This decrease in year-over-year inventories is the result of acceleration of $10 million in receipts in the prior year second quarter as a result of last year's uncertainty surrounding quota, particularly from China.

Looking forward, we are projecting our third quarter earnings at $0.80 to $0.82 per share, which represents a 13% to 15% improvement over the prior year, with corresponding revenues of $560 million to $565 million, or an increase of 5% to 6% over the prior year.

For the year, given our strong second quarter results and our third quarter projections, we're raising our 2006 earnings per share estimate to a range of $2.46 to $2.50.

This represents an increase of approximately 31% to 33% over the prior year, with corresponding revenues of about $2 billion, or a 5% increase over last year.

We've increased our guidance for the balance of the year, but based on a somewhat more conservative view of business and current trends.

If business trends were to continue at their current pace for the second half of the year, we believe we would exceed current estimates.

And with that, we'll open it up to questions.

[OPERATOR INSTRUCTIONS] Jennifer Black, Jennifer Black & Associates.

Good morning, and congratulations on a great quarter.

Thank you, Jennifer.

I wondered if you could speak a little bit about the retail environment, as far as in the department stores.

It seems as though with the changes being made with Federated/May that you guys are in a great position, just as Polo has been in a great position to get some of the best base in the stores.

Can you comment on that, please?

As far as Calvin Klein is concerned, the May/Federated merger for us was a home run.

Calvin Klein is an anchor brand for them.

We continue to garner, for men's sportswear, some of the best space.

If you walk into a Federated department store, I think that you'll see Calvin Klein product categories across-the-board.

We continue to grow at Federated.

They are key portion of our growth going forward with Calvin Klein, and we believe we're -- we know we're linked strategically with them as we go forward.

But in addition to Calvin Klein, some of our more main floor brands, IZOD, Van Heusen -- IZOD has continued to maintain their space, both at May and Federated.

Continued to grow their business, and our performance there has been very strong.

And as well with our Van Heusen and the balance of our design and dress shirt business, we've also had strong performance with Federated.

So We feel as if we're in very strong position, and we think it lines up with our -- with this environment that we're dealing with, we think our multi-channel, multi-distribution play is what's important to us.

We need to be able to have the appropriate brands for the appropriate channel of distribution.

And with our brand portfolio, we're really able to go after that as well.

Our performance with Federated has been very strong, both in dress shirts and in sportswear.

Is there anything at all that worries you?

Well, you know, it's hard -- we've tried to be conservative as we've projected, given the trends that we've seen in our own business.

And it's hard not to be conservative when you listen to the evening news, you hear about gas prices, the world at large, and what goes on.

And when we sit back, I do get concerned about the impact that has the potential to have on the consumer as we go forward, this constant drum beat of potentially bad news, of tenuous news, at best.

So I guess that's my biggest concern.

But to be truthful, we haven't seen it in our business.

Our retail business that we have, that we see on a daily basis, comp store performance has been stronger over the last 6 weeks of the quarter than it was over the first 6 weeks of the second quarter.

And that trend has just continued into the third quarter -- early third quarter results of this year.

Our initial selling of fall product and the back-to-school selling season at department stores and in the mid-channel has been very strong, and I think we are going to benefit from our inventory position, both our inventory that we hold and inventory that's in the channel.

It's very clean.

We have no lumps of inventory sitting anywhere that we need to work our way through.

So I think our gross margin will continue to perform if the sales come.

Okay.

Great.

Well, good luck, and I'll see you at Magic.

Margaret Mager, Goldman Sachs.

Ms. Mager, if you would just release your mute function.

Jeff Klinefelter, Piper Jaffray.

Yes, congratulations, everyone, on another great quarter.

Thanks, Jeff.

Question for you, Manny.

If maybe we could talk a little bit more about the CK licensing business, both domestic and international.

And maybe starting with just a recap on a run rate basis, what kind of -- generally, what percent of the licensing revenue is coming from the key product categories, going through the fragrance and denim, et cetera?

Kind of looking at international versus domestic split at this point, and just trying to get a feel for going forward, what would be the biggest opportunities for outsized growth in that revenue line?

Would it be new international markets that are opening up, new geographic territories, or are there additional product categories coming online?

And then just a follow-up to that.

Jeff, I guess just to take a step back.

We target the top line growth in our licensing business on the royalty line between 9% and 11%, so let's call it 10%.

First half of the year, if you took first and second quarter together, we averaged between 13% and 14% royalty revenue growth.

So, we outperformed our basic model.

And the way the financial model works, when that happens, a disproportion amount of the royalty revenue will fall to the bottom line, as in this quarter, we experienced a 40% growth.

There's a number of initiatives going on.

I think the continued opportunity for Euphoria on the fragrance side is there.

That would be both internationally and domestic.

The launch with men's will continue to fuel the new initiative -- excuse me.

And in addition, they are really significantly increasing their marketing spend.

They've done it now consistently since they've taken over the business over the last 2 years, and continued to invest in the brand.

And you see it everywhere in the advertising.

So I think that's an area where it can have significant improvement.

I believe the woman's better sportswear business, based on the initial reaction, could really start to fuel some growth as we go forward.

If not, this side of this fiscal year, as we look out into 2007, I think that there's untapped opportunity there, that because of execution issues, just wasn't able to be captured when we originally launched it.

It was the only license that really underperformed it's business plan.

And I think they've really made some tremendous investments, both in talent, people and marketing and fixturing the shops, that we could really see some strong performance there, as well.

There's a number of new launches going on.

The Bridge better sportswear in Europe is really hitting second half of this year.

We should start to see some stores opening as we go forward end of this year into next year.

The underwear business, as much as I continue to think it's such a strong business for us, we continue to see growth there, new initiatives.

Warnaco is doing a tremendous job with that, as they roll it forward.

So we see upside there, as well.

Looking out to next year, we talk about color cosmetics comes onboard second half of next year.

In the fourth quarter of this year women's dresses comes on board.

I think that will be a very nice supplement to the woman's coats, the suits, and of course the sportswear.

So I really think there's a number of significant growth initiatives there.

And there's the ability across-the-board to do better than what we're targeting as a financial model, as long as the consumer stays there and we continue to see [inaudible].

We have some real opportunities to outperform our plan second half of this year into next year.

Okay.

Just a follow-up, Manny.

Total door potential at this point, what you're thinking about for your woman's sportswear product?

And then how much of your licensing revenue.

I'm sure if you don't want to quantify it, we don't have to.

But if it comes from, or is coming from this year, fragrance versus your denim license?

And then also, just international markets or licensing opportunities for Arrow or IZOD, anything there on the horizon?

Okay, let me take those one at a time, and see if I can get it all.

I guess we don't talk about royalty revenues.

But we do size the fragrance.

It's about a $1.1 billion retail business worldwide.

It's 50% based in the U.S. 50% outside the U.S.

The next largest product category on the license for us is jeans.

That's about a -- worldwide, about a 900 to $1 billion retail business worldwide.

So just to put the size of those in perspective.

The door count for, as I said, the door count should be this year for fall for women's, somewhere around 270 doors.

Next year, spring is targeted to be about 325.

I think we believe the potential is between 500 and 600 doors, and what's really going to drive that, Jeff, is performance.

I think the product looks great.

I think the shops look great.

We have to now see the sell-through.

Initial selling has been promising.

But again it's August.

The goods have hit the floor in the last 3 weeks.

It's too early to get too far ahead of it.

But all the reactions and the enthusiasm from our retail partners has really made us feel good about where the brand is positioned.

And as we have looked in the looked in the showrooms, we think fall looks great, but we think holiday looks even stronger.

So, that's where we are in the Calvin side.

Okay.

Great.

Thanks, Manny.

[OPERATOR INSTRUCTIONS] Bob Drbul, Lehman Brothers.

Hi, congratulations.

Thank you.

Could you talk a little bit about, on the inventory side, maybe quantify the inventory position sort of on the wholesale side versus your retail stores?

Yes.

The bulk of the -- I guess it's pretty much equal between the 2, Bob, when you talk about -- if you're talking about the 2% on the prior year.

And both are about equal, each of the 2 operating units are about to 2% to 2.5%, depending on which one, to the prior year, down.

Okay, and then just on a follow-up.

On the -- you ended with a pretty healthy cash balance.

Wondered if you could maybe provide just some updated thoughts on uses of cash as you look over the next 12 months.

You know, Bob, it's very consistent with what we've been saying.

Our first priority, our first and second priority are acquisitions and acquisitions.

We would like to continue to look for brands that make sense, the product categories that make sense, that we could layer into our business model.

We think we could get significant leverage off of that business model.

We've talked about our platform.

We believe we want a very efficient operating structure from a logistics and sourcing point of view, and we could take advantage of that platform and our expertise, both in licensing and product development.

So we continue to think that that's on there.

Those acquisitions are going to happen when they happen.

Absent an acquisition, if we -- we're going to end this fiscal year with probably $400 plus million of cash.

And I've said consistently that Phillips-Van Heusen is not a bank.

We would put that money to use looking at our capital structure, if there wasn't an appropriate acquisition for us.

I don't know if that means buying back stock, or if that means buying back debt.

But whatever we would do, we would look to do a transaction that would be accretive to our shareholders, and would make the most sense.

So we'll continue to look at that, and continue to measure that as we go forward, particularly now that our equity partner, Apex, is ahead of our stock.

Their preferred has been retired.

So we're in a really good position now, from a balance sheet point of view, to look at different ways that may enhance our balance sheet.

Okay, great.

And then just one more question on Calvin Klein, the men 's better sportswear business.

Can you just maybe update us around the sales productivity levels on average that you're seeing, and whether or not the door count has changed longer term, or where you ended this quarter and where you expect to end the full year?

Allen is going to answer that.

Hi, how are you doing?

Good.

Calvin continues to perform well above departmental averages in the competitive set.

We finished the spring season up 45% to last year in 485 doors, which was 100 more than the prior year.

We intend to finish the year at about 552 doors by year-end, and expect that we will see an increase for the year in excess of 35% all in.

We're very enthusiastic about our performance.

Our productivity is up, our profitability in retail is up.

But most important is we have a $4 average check above the competitive set at most of the retail stores, and that is a sign to the quality of sales; regular sales being the driver to the business as opposed to clearance issues.

So we're very excited about our progress to date, and very optimistic about our future.

Okay, great.

And then just one final question.

On the Calvin Klein outlet business, where did you end this quarter on the outlet stores?

And can you maybe just discuss sales productivity in those stores, and profitability versus your other formats on the outlet business?

We've got about 65 stores as of today.

And I guess with the sales productivity point of view, obviously they are our most productive stores.

They are at industry highs across-the-board, well above $400 to $450 of sales per square foot.

And when you do that kind of sales per square foot, given the infrastructure that we have behind it, those stores are very, very profitable for us.

They are our most profitable retail chain.

And we think that there's an opportunity to be, over the next 2 to 3 years, to be somewhere around 90 stores.

So as we have added on stores, we've been able to add-on real winners going forward.

Great.

Thank you very much.

Liz Dunn, Prudential.

Hi, good morning.

And let me add my congratulations, as well.

In terms of the licenses that you've recently signed with G3, the suits and dresses, when you look out at the, I guess 500 to 600 door goal that you gave us for women, is that included in there?

Or are those separate doors?

And why give the license to G3 instead of one of your other existing license partners?

That's my first question.

Well, we think 2 things.

G3 has been a -- prior to doing suits, was our outerwear license.

They have real expertise in the suit area, in the dress shirt, and in the dress area.

They've also performed for us at a level that has been exceedingly strong.

Everything that they say they are going to do, they deliver.

They bring talent to the table.

They've outperformed all of their plans.

And we have a great deal of confidence in their execution.

They do things the right way, from a product and merchandising point of view.

The suit and dress category, as well the [inaudible], is really sold more in the classification area, as opposed to the collection area.

We think they have expertise in that.

And we made the decision as a management team that they were our best partners going forward.

And we've given them the business.

Okay, and is it included in the 500 to 600 doors?

Is that both the Kellwood stuff and the G3 stuff, or are you just saying -- ?

Well, there is the potential to have 500 to 600 shops, sportswear and Calvin Klein white-label better shops in the United States.

There -- at this point in time, we're targeting between 500 and 600 doors that we'll be selling dresses and suits in.

There and there may be an opportunity to do more doors in a classification business, and that's to be seen.

But at this point, we think the appropriate door count for them would also be 500 to 600.

Okay, great.

And then my second question relates to the acquisition market as an active acquirer.

What are you seeing in the environment?

We've obviously seen some pretty high profile deals that were rumored to happen, and didn't happen.

Does it seem to you that some of the frothiness marketplace driven by private equity is easing?

Or is there any comments you can add there?

Thank you.

I guess I would say it's probably -- it's a little too premature to say that yet.

And the reason I say that is the capital markets continue to be strong from a financing point of view.

But it seems like the cost of capital has increased over the last 3 months, and I think that has the potential with private equity money to put some pressure on the amount that they can actually pay for the deals.

Some of the deals and some of the structures that I've seen, not just in our industry, but across-the-board, there's been some very full prices, and some pretty high leverage on any kind of transaction that goes forward.

So, my sense is, and I can't quantify this, because it is a little premature, is that some of the frothiness is coming out of it, and some more reality is coming back from a multiple that you would be paying for businesses.

And we're hopefully going to start to see some of that as we go forward.

Would you have to consent for anyone else to buy Warnaco, consent to transfer those licenses?

Those 2 -- the business that Warnaco operates for us - the jeans, underwear - those are older agreements that we inherited when we acquired the business.

Short answer is no, we don't have the right to stop a transaction; they don't need our formal consent.

But we do have significant creative control and other issues that I would imagine anybody was going to do anything, they would need to speak to us to understand the business and understand the requirements.

Okay, thank you.

Congrats again.

Omar Saad, Credit Suisse.

I'm hoping to follow-up on an earlier question on the retail business, Calvin Klein retail, how -- where does that business stand internationally?

I understand you're using licensed partners.

Can you give us an update on where we are with that?

Yes, there are approximately 300 Calvin Klein licensed retail stores, under numerous store fronts.

Calvin Klein jeans, Calvin Klein underwear, CK, Calvin Klein, and then of course our collection business.

Those businesses at this point in time are all run, with the exception of the Madison Avenue store that we operate, those full priced stores are all run by our licensing partners, and we collect royalties based on sales as we go forward.

And what's the growth in those different types of stores internationally?

I mean, does one area have a better -- have a higher growth profile than, perhaps say the jeans or the underwear?

I'm just trying to get my arms around that, and where that 300 number can go.

Well, we believe over time, that that 300 number store internationally could double.

The growth that we significantly would see would be in the CK Calvin Klein sportswear business.

That business is really going from 0, and there's the potential to have anywhere from 100 to 150 freestanding stores.

When you start to talk about certain geographic areas that we're just getting involved in, like India and China, retail becomes even a larger component.

Throughout Europe, freestanding stores are a significant component.

So Warnaco has been very aggressive on the underwear side of the business with their acquisition of the CK jeans business internationally.

That's been a growth vehicle for the former licensee, and Warnaco has been very consistent that they're going to be opening stores.

There's license requirements that they do open stores for all of those businesses, and we hold them to that.

So it's a real opportunity for us, and I think that the size, at this point, I think is a good number over the next 4 to 5 years, is the retail number of stores could double.

And to follow-up on that, the CK bridge, have you -- what's your thought process in terms of having that kind of line, higher price point line, here in the U.S., whether it's owned retail or through department store channels?

Well, we think that it's a real opportunity for us, particularly in women, and we haven't -- we have not gone after that opportunity in a big way yet in the United States.

We really would like to get it positioned internationally first.

We think that there's an opportunity for CK Calvin Klein brand, particularly in that specialty department store range, and with the potential for some freestanding stores, and that's down the road.

I'm thinking the United States has the potential at retail to be a $300 million to $400 million business across all categories on retail.

Okay.

And then one last question.

On the SG&A in the quarter, there's a little bit of deleveraging, had some leverage -- you were able to get some leverage last quarter.

What are the key drivers that we should be focusing on for that line, and how should we think about it going forward?

I guess the first one is a 3% growth in sales.

So as we grow our business, we don't add much in expense, Omar, so we can drop significant amounts to the bottom line.

I guess, Omar, in the quarter we've said there was -- we increased our marketing spend, that's somewhat discretionary, we made the decision to invest.

And as Mike said, we had a 3% sales increase, and that was really impacted by the planned door closing associated with May and Federated.

We planned the impact of that this year to be about $25 million.

That impact was really in the first, second quarter.

For the most part it's behind us.

So as we go out, we should start to see some leverage on the sales line.

That will be offset, when you look at it from a financial point of view, in that we'll have the expensing of stock options that we didn't have last year.

And we're going to continue to make some investments in marketing.

But nothing has changed in the business model as we go forward.

Perfect.

Thanks.

Great job.

Elizabeth Montgomery, Cowen and Company.

Hi, guys.

Congratulations on the quarter, as well.

I have a couple questions.

I guess, Manny, on the dress shirt business, could you, if you have these, how was the sell-through in the doors that were not impacted by Federated and May in dress shirts in the first half?

Well, I'm going to just turn that to Allen.

Our dress shirt business continues to perform.

Last year was a remarkable year for the dress shirt business.

The overall channel, particularly the dress shirt, was up 9% in all channels.

We performed at a level of 16% for the year, and we're really the driver of that good performance.

In the non-Federated businesses, we continue to have high single-digit comp increases.

We are performing well above the departmental averages.

I would say in general that the dress shirt business is not as robust as it was last year.

But within certain customers, we're finding that the consumer shifts that are coming, particularly in the moderate areas, are boding well for our businesses and our business relationships in certain accounts.

So, overall, we're very happy.

We have a 3% comp for the year-to-date, and that includes the Federated/May merger, as well as the consolidation, the large consolidation at Mervyn's.

Okay.

And then in terms of the non-Calvin Klein wholesale businesses, could you just outline the opportunities to grow those again?

Maybe whether it's expanding doors or increasing floor space within the doors or increasing full price sales or adding on new categories?

Well, it's a brand by brand story.

With Arrow, the opportunity is to continue to grow with the expansion that's going on at Kohl's.

They're opening somewhere between 80 and 100 doors a year annually, so that growth will continue.

We have a major position with Kohl's.

So although we continue to try and gain more market share, at this point we have a great presentation as to where we'll go.

With IZOD, it continues to be all about product extension.

We've continued to really see strong growth on the bottoms business.

Historically, IZOD has been a tops business.

But over the last 2 years, we've really grown our bottoms business significantly, both shorts and the pants business.

So that continues for us.

We don't believe that there's really door expansion with IZOD number of doors.

We believe it's all about product extension and performance.

And we think once this May/Federated and store closures settle in behind us, we have this new base to top off of, we'll be in a very good position to continue our historical growth rates in the business with mid single-digits.

And that should do our double-digit bottom line growth.

And then just 2 quick questions on the licensing.

Have you guys assumed a lot of royalty growth from the relaunch of the Calvin Klein women's better sportswear in the back half?

And how, if at all, does Brown Shoe's decision to leave the best footwear license affect you guys?

Okay.

I'll take the Calvin Klein, and then Allen will talk about Brown Shoe and Bass.

On the Calvin Klein side, as much as we have -- we're feeling really good about the performance of the women's business and are enthusiastic about it from a financial point of view, we're still planning that business at minimums.

We're not assuming that they are going to exceed their minimums at this point in time.

So there's no financial risk to the plan.

And if anything, particularly for next year, there could be financial upside against our plan.

So, that's the way that business is being financially planned.

And Allen will talk about Bass.

On the Bass side, obviously, Brown Shoe has announced that they are not continuing with the brand, which is a joint announcement between the 2 companies.

The Bass brand, the way they had positioned it, was not in a strategic alignment with their objectives, and certainly was not in line with our strategic objectives for a full lifestyle positioning.

We will address that as we go forward with the selection of a new partner.

We believe that the brand has much more brand bandwidth than it was positioned into, and we're enjoying that experience and that benefit in our own stores.

As far as the financial implications, there really are -- it's minimal.

When we signed the relationship with Brown Shoe, it was meant to be a marketing initiative.

We were going to reinvest the money to create the halo for the brand, and therefore, the financial ramifications of the separation are minimal.

Okay thanks, guys.

Good luck.

Brad Stephens, Morgan Keegan.

Hi.

Good morning.

Congratulations on a great quarter.

Thanks, Brad.

Back to -- following-up on Liz Dunn's question, at this point, when you've got women's better sportswear and IZOD women's sportswear, and all of these licensed out, I mean at some point do you feel comfortable launching women's -- bringing those all back in house and doing women's?

Well, that's obviously, when we talk about our strategic objectives going forward, that's one topic that comes up significantly.

We today operate about $400 million of women's business in our own retail stores.

So we know how to design the product.

We know how to source the product.

We're very familiar with the product.

And it's an area that could be a growth opportunity as we go forward.

We'll approach it very cautiously.

But whether it's bringing licenses back in over time, or potentially new business opportunities, it's something that we're going to consider as we go forward.

But we're going to do it in a very considered fashion at this point.

Okay. 2 other questions.

Looking to the back half of the year at the Calvin Klein men 's business, can you talk about product categories, or big trends that you think will be important to your business?

And then number 2, on the sourcing front, given rising transportation costs and inflation overseas, could you remind us of your sourcing structure, and how we should think about if you're starting to see inflation, and if you can pass that through?

Any color would be great.

Okay.

So let me deal with sourcing first.

We're very balanced in sourcing, I think as you know.

We've closed this year.

We announced when we closed our last [inaudible] domestic manufacturing facility, that will really benefit next year's overall sourcing cost as we go forward.

From -- as we look out, spring is bought and secure, and we're very comfortable with the spring purchases.

As you can imagine with the price of oil and a number of issues, there is some pressures on cost of product as we look into the third and fourth quarter of next year.

We're in discussions and we're moving -- we're looking to move some sourcing in order for it to be -- have a minimal impact on it.

But there is some pressure coming from cost as we go forward.

And I think we'll be able to zero that out, but I don't think we're going to see the way we've benefited in the last 2.5 years from cost declines.

But we think there is some opportunity for some price increases going forward.

If not formal price increases, more full price selling, less allowances as we continue to manage the inventories, understand the business better, and improve our overall gross margins with our retail partners.

Okay.

Then on the Calvin Klein categories for the fall?

I guess, one of the -- from a product assortment basis, one of our clear initiatives is to bring to the collection floor more basic, more replenishment goods.

We continue to do that.

We try to make true fashion a less component of our business, while keeping the Calvin Klein aesthetic.

That's worked very well for us from a gross margin point of view.

We've entered categories like leather jackets that is high unit -- average unit retail out the door, and work very well for us as we go forward.

And the whole bottoms area in Calvin Klein has been bigger than we've expected and has grown, and we have intensified that area as well.

We're really showing in those stores a full lifestyle presentation across-the-board.

And I think when you go in there, for us we launched the business 18 months ago.

We're learning.

We've had tremendous success.

But as we learn more and more about it, we tend to get more and more success there.

All right.

Great.

Thanks, guys.

David Glick, Buckingham Research.

Good morning, and congratulations to the whole team on a great quarter.

Manny, I was wondering if could you share your most recent thoughts on your acquisition priorities, particularly in areas that are not necessarily core to your business?

What would your relative appetite be to make acquisitions in the women 's business, specialty retail, and brands with distribution in the luxury department store channel?

Well, I guess the truth is we start with -- I don't see us making an acquisition that's going to be retail dominated.

We're all about brands.

If there's a -- we'd love to have a retail component to a branded strategy that would make sense, but I don't see us buying a specialty retail store chain at this point in time in our evolution.

Women's, although we're looking at it, it's not a priority from an acquisition point of view, going out there to look to do an acquisition to bring something in.

We'll look at those opportunities.

We're really focused on brands.

We'd love to focus on a brand, I've said this pretty consistently, that would make sense.

That would position us in the channel distribution specialty department stores, Nordstroms, Neimans, that ilk of department store, that we have minimal distribution with today.

It would balance our portfolio.

So an appropriate brand that would fit into there would make sense for us.

When we look at product categories, I don't see us going into brand new product categories, but things that would lateralize and fit appropriately in our portfolio is what we're looking to do.

We're not looking to -- with the growth we have in Calvin Klein, both from a licensing point of view and the businesses that we're experiencing, the growth that we see with IZOD, in particular, Arrow, we don't feel the pressure that we need to go outside our areas of expertise to garner growth.

We don't have that kind of pressure, where maybe some other companies do.

So I don't see us groundbreaking on the acquisition side.

I think when we announce an acquisition hopefully in the future, it will be an acquisition that will make complete sense to the Street.

It will be an acquisition that fits into our portfolio, and will be strategic.

It won't just be about trying to gain a few, 2 pennies of accretion.

It will be something that fits our portfolio and our strategy going forward.

Great, thanks for that clarification, Manny.

And Allen, just a quick question for you.

Can you comment on the opportunities to pick up perhaps some additional business above your plan in the second half to capitalize on the strength of Penny's, Federated and Kohl's, and perhaps capture some of the business that's been displaced by the Federated/May doors that have closed, the transitioning of the May assortments to Macy's.

Are there some significant door or brand opportunities that you can capitalize on that could represent some opportunities above your current plan?

As Manny mentioned in his overview, we expect to see a stabilization of all of our wholesale businesses into the third quarter.

We think that the major transitions at Federated and May and Mervyn's and the breakup of the Sachs group all will stabilize and prevent -- will present a platform for us to grow our businesses.

We have baked into our numbers in the fourth quarter a resumption of aggressive marketing in the non-Fed/May areas, the Belks, the Bon-Tons, the Boscovs, the more moderate stores have opportunities with our moderate brands.

We have strong initiatives at Penny's and Van Heusen and IZOD, and our position with Kohl's with Arrow and Arrow and Chaps and the dress shirt area are all performing extremely well.

We think the portfolio we have of brands and distribution multi-channel, multi-account is working extremely well for us, and has allowed us to transition our way through these market shifts in a very positive way.

So you will see a resurgence of forward momentum in both the dress and sportswear areas into the latter part of this year.

Great.

Thanks very much, Allen.

Andrew Burke, Post Advisory Group.

A couple of housekeeping questions real quickly, and then another follow-up after that.

What's your revolver availability at the quarter, and what was the CapEx spend?

About $325 million is is the revolver availability, less approximately 100 of what's outstanding.

Okay, and then the CapEx spend in the quarter?

I'm sorry?

Your capital expenditures in the quarter were how much?

For the quarter?

Yes.

We're projecting about $45 million on the year, and I believe for the quarter about 15 for the year-to-date, not the for the quarter.

About 7 for the quarter.

Which is about 7 on the quarter.

Okay, and then you guys did a great job in terms of getting some margin improvement.

How much of that is from the sourcing cost side of the business?

How much of that is coming from pricing?

I'd say 75% of it is coming from the a [non-course] area. 25% is coming from sourcing. 75% is coming from more full priced selling of goods, less allowance requirements, and less markdown requirements in our own retail stores.

So much more full price selling.

Okay that's great.

And then lastly, your $0.80 to $0.82 earnings guidance, does that roughly translate into -- I'm looking back into like an upper 80s to $90 million kind of EBITDA number.

Am I in the right ballpark there?

Overall, for the third quarter?

For the third quarter.

You're -- more towards the lower end.

Okay.

Thanks, guys.

Robert Samuels, JPMorgan.

Mr. Samuels?

Do you have your mute function depressed, sir?

Susan Sansbury, Miller Tabak.

I'd like to ask a question about your -- or get you to reiterate your acquisition strategy, in terms of whether you're still committed, were it to occur, an immediate accretion level.

Can you talk a little bit about how much integration effort you're willing to put?

I mean if -- would you consider something that needs to be restructured or -- with assets for sale?

And can you just talk to me a little bit about what your committment level is, or how strong you feel about maintaining the Calvin Klein licensing model at this point?

Okay.

Let's take it in pieces.

I guess from the acquisition strategy, the level of committment, and the level of potential restructuring really has got to be judged against the opportunity, and potentially of what you are buying.

I'm not -- I've been very clear.

From my point of view, there's 2 types of transactions.

There's an add-on bolt-on type of a transaction, which usually would be in the range of 75 -- acquisition of $75 million to a $250 million, $300 million acquisition where brand that you layer on to your business or private category that you layer on to the business, that would have some integration issues, but would be minimal.

Any kind of transaction like that has clearly got to be accretive out of the box.

I can't imagine that we would do anything that wouldn't be.

It's the only thing that makes sense.

Given the accounting and how things work and our cost of capital, which is an advantage for us given our cash position is clearly, that type of transaction would have to be accretive.

If it's a bolt-on type of a transaction, it would need to be a transaction that would go up on our platform, and the integration, although intense for a short period of time, would be rather minimal.

So that would be there.

For a transforming type of a transaction where we would take on a major acquisition, if it was the right opportunity that could take the Company to the next level, we would take on the challenge of whatever was necessary to do that, as long as we restructured prudently from a financial point of view, and we saw a clear path from an integration point of view and restructuring.

Last part there is whatever we would buy, we're not going to -- it's fine and we would be very happy to fix a back office, an infrastructure, a sales strategy.

But we're not going to fix a brand.

So we're not going to buy a beat up brand that needs fixing, and hundreds of millions of dollars of marketing money to get it right.

So we would be looking to buy something that has got great consumer recognition, and that we could take our platform, which we think is a competitive advantage, put our businesses on it, and rollout on top of that.

So I hope that clarifies it.

For a transforming transaction, as we did with Calvin Klein, would I take short-term?

Would I be willing to accept some level of short-term dilution?

Yes.

I would hope it wouldn't be necessary.

But yes, I would do that if it made sense strategically, and if the long term growth prospects or overall profitability reflects that it made sense to do that.

Okay.

What about -- can you talk about the Calvin Klein licensing model?

Well, we continue to be very much fans of the Calvin Klein model, particularly because we see such strong growth ahead of us as we go forward.

We love the model because it blazes -- it's trailblazing and you don't have -- we don't have the start up cost.

We're able to get it associated with experts in the area.

As that business matures, as we go forward, it's something that we would look at that might make sense over time for 3 to 5 years from now to maybe bring businesses back in house, buyback licenses.

Those are all valid strategies that we would look at, and in order to get involved in complementary product categories that we would think would make sense for us as we go forward.

Where we think we have core competencies, we would want to run the businesses ourselves.

Some of those businesses that we do have core competency in, because of the duration of licenses that we inherited, we're forced to run a licensing model.

It's very profitable for us, but our first choice would be obviously to run those businesses.

But at this point, that's not in the cards.

Glad to hear it.

Another question for Mike Shaffer, if I may.

I may have misunderstood you, but did you say that your customer base across all distribution channels were being more conservative with respect to their outlook for the second half?

And if so, can we sort of -- can you give me a pulse reading department store, mid-tier outlet store?

Susan, I think it was my comment that maybe was misunderstood.

Oh, I'm sorry.

I spoke about our retail business, our outlet retail business, in particular.

And what I said was, we were planning the business more conservatively.

We're doing that because of the world at large, and because in the fourth quarter of last year, we had a very strong comp store performance of about plus 8%.

So we'll be up against that in the fourth quarter, and we're just planning more cautiously.

We haven't seen anything in the business at retail that would say it's slowing down.

We have inventory in the pipeline and onhand to support a stronger comp store performance if it were to happen, and we've demonstrated the ability to chase goods and get back into goods, so I'm not concerned about that.

On the wholesale side of the business at department stores, the mid-tier, inventories are very clean.

A big portion of our business, particularly dress shirts, is a replenishment, [EVI] business, the inventory is there to support.

Our retailer's growth plans, they are all planning for the most part single-digit comp store sales increases 3%, depending on who we are talking about, mid-tier may be a little bit more aggressive.

So we are there.

It really hasn't seen any change in their direction about where they see business going, and our order book that's there is really -- is very healthy as we go forward.

And then one of the reasons why we've raised our second half sales guidance, excluding licensing, to a little bit over 5%.

Great.

That was very helpful, Manny.

Good luck for the back half.

At this time there are no further phone questions.

I'll turn the conference back to our hosts for any additional or closing remarks.

Well, we look forward to speaking to you again at the third quarter conference call.

Any of you who are going to be out at Magic, I look forward to seeing you there.

Enjoy the balance of your summer, and thank you for your attention.

Bye.

Once again, that does conclude our teleconference for today.

We would like to thank everyone for their participation.

Have a great day.