PVH Corp (PVH) 2007 Q1 法說會逐字稿

Good day, everyone, and welcome to today's Phillips-Van Heusen Corporation's first quarter 2007 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, re-transmitted, rebroadcast, downloaded or otherwise used without PVH's expressed written permission.

Your participation in the question-and-answer session 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 contains certain forward-looking statements which reflects PVH's view of future events and financial performance as of May 30, 2007.

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 operation 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.

The 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 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 Emanuel Chirico, Chief Executive Officer.

Please go ahead.

Thank you very much.

Good morning, everyone, and thank you for joining us.

Joining me on the call this morning is Allen Sirkin, our President and Chief Operating Officer; Mike Shaffer, our Chief Financial Officer, and Pam Hootkin, our Treasurer and Director of Investor Relations.

We were really very pleased with our first quarter results, particularly given the difficult retail environment in the first quarter with the unseasonably cold weather we had in April.

Each of our businesses posted strong operating results.

Let me start with the Calvin Klein licensing business.

Overall, Calvin Klein posted a 37% increase in royalty revenues in the first quarter.

And its operating earnings were up over 45%.

That business was really driven by some of our major licensing categories.

Let me start with fragrance.

We posted very strong business here.

It was driven by our launch of CKIN2U.

That new product launch was very well received, exceeded all of our plans for the quarter.

The euphoria business continues very strong for the quarter, and it just continues to be a real strong brand franchise for us as it continues.

And all of our Heritage Calvin Klein fragrance businesses continue to perform well in the quarter.

We also announced about three or four days ago that in the back to school selling period we'll be launching a new men's fragrance Calvin Klein Man, which we really have high expectations for beginning with the back to school selling period.

So the fragrance business, which has been very strong for us, last year it grew at a rate of almost 20%.

This year it's on target to grow at a similar level on an annual basis and exceeded that in the first quarter.

Continues to be a real strong business for us.

Warnaco, I think as you all know, they posted their results a few weeks ago, had a very strong quarter driven by their Calvin Klein businesses.

Both jeans and underwear had very strong results for the first quarter.

That business particularly was driven by the international portion of the jeans and the underwear business where there was very strong double-digit increases for both of those categories internationally.

The business there continues to be driven by new product innovation, by the continuation of the expansion with new retail stores throughout Europe and Asia.

So we're very excited about that business.

We think it's going to be strong for very much so from an international point of view.

Some of the other categories did well for us.

G3, our licensee for women's dresses, suits, and outer wear.

The women's dresses which launched late fourth quarter last year had a very strong first quarter for us.

The dress category is a strong category in general.

And we are participating in a very strong way with that growth.

It didn't really seem to have any impact on our suit business at department stores, that business continued very strongly for us, as well.

So overall the Calvin Klein business some new product introductions and a continuation of strong businesses in our very large licensing businesses fragrance, jeans, and underwear.

On the marketing front with Calvin Klein, we had some exciting news.

We opened with one of our strategic partners in the Far East.

We opened a new Collection store in Beijing, that's our sixth store, Collection store worldwide.

It's about a 3,000-square-foot store.

We're very excited with that.

And we also had a major press event, the world of Calvin Klein in Tokyo.

And that event was covered by all the major international press.

There was about 1,000 people in attendance, very strong presentation.

And it's just another indication of the strength of the brand, the global demand for that brand, we're very excited about the Calvin Klein business and the strength that we see in that business in the first quarter.

Looking at our operating businesses, our combined retail and wholesale business posted a 14% sales increase and a 14% increase in operating earnings.

Looking at each of our business components there, our retail business, our outlook business posted a 4% comp store increase on a shifted calendar basis.

We also experienced very strong sell throughs and higher margins at retail.

This really drove the improved profitability for us.

We were very happy with our retail performance for all five of our outlet businesses, our outlet chains.

The tone of business in May improved above what we saw in the first quarter.

Our outlet business posted between a 6% and 7% comp store increase for the first three weeks of May.

So that business continues to perform for us, and we feel very positive about how that business is working, our inventory position and our overall profitability there.

From a wholesale point of view, our dress shirt business had a very good quarter, both from a sales and a margin point of view.

As you would recall last year's first quarter, this division was dealing most directly with the May-Federated merger.

Obviously, that repositioning, that remerchandise is all behind us.

And this business really enjoyed a very strong first quarter.

At retail, our average unit retail selling prices are up considerably over last year.

We have improved overall margins and increased profitability for this business.

Our brands continue to outperform the department.

And we feel very good about the way our dress shirt business is performing.

As an adjunct to that and our neckwear acquisition, Superba, is exceeding our expectations.

The integration of that business is well ahead of plan, and is virtually complete as we enter the second quarter.

The business is running ahead of plan, and we believe there could be upside to our initial estimates for this business, particularly in the second half of 2007.

Continuing in our wholesale business, our sportswear business, our moderate sportswear brands, Van Heusen, Arrow, and to a limited extent IZOD, were really negatively impacted by April's soft selling at department stores.

The unseasonably cold weather required us to be more promotional on seasonal merchandise in order to make room for new deliveries.

Our basic strategy is always to move through merchandise quickly, make room on the floor for new merchandise as it hits and we were very aggressive with that.

As a result of all that, we increased our markdown support budgets in the first quarter.

It's all reflected on our numbers and our guidance.

We have seen a significant improvement in the tone of business at retail in May.

We have moved through the inventory and our businesses we feel are back on plan for May, our sales, and from a profitability point of view.

So we feel our moderate sportswear businesses are really back on track as we head into Father's Day for this year.

Our Calvin Klein men's better sportswear Collection business continues to perform exceedingly well.

We're running well ahead of last year and well ahead of plan for this year.

At department stores, and Federated in particular, Calvin continues to be one of the best performing men's collection sportswear businesses on the floor.

And we measure that on a sales productivity basis, sales per square foot and on a maintained gross margin.

So we're very happy with our performance there as is our customers.

Just a couple of notes on some of our newer businesses that are, will start to ship in the second half of the year, in particular, our IZOD women's business.

The market reaction to the lines we've presented has been very positive.

We believe there could be upside to our sales plan for the second half of the year as we start to roll in our orders that are coming through.

So we feel very positive about that business.

The business that we're taking over from Kellwood is also performing very well at retail.

It's probably the best performing it's been since its inception launch of the brand.

So we're inheriting a very healthy business.

And as we go into our selling season, we should start shipping end of June-July.

So we'll see some initial selling in June-July, but really this, we'll have a better fix on this when we report our third quarter.

But all indications are very positive as we go forward.

And with that, I'm going to turn it over to Mike to quantify some of what I've talked about.

Thanks, Manny.

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

Total revenues grew 17% in the first quarter to approximately $592 million.

Fueling our revenue growth was our Calvin Klein licensing business, which posted a total royalty revenue increase of 37%.

We're also very pleased with our wholesale and retail businesses which had a combined revenue increase of 14% over the prior year driven by our newly acquired neckwear business, which was ahead of plan, and our retail divisions which had a 7% comp store increase.

If we adjust our retail comps for the calendar shift and compared the 13 weeks ending May 6, 2007, with the 13 weeks ending May 7, 2006, our comps were up 4%.

Our gross margin for the quarter was 49.4%, a 150-basis-point improvement over the prior year, driven by strong Calvin Klein licensing results, strong gestured sell throughs, and strong performance of our outlet division.

EPS for the first quarter increased 24% over the prior year to $0.92.

This was $0.07 better than our previous guidance.

Our first quarter earnings per share includes a gain of $0.02, related to a gain on the lease of escrow funds from the sale of an investment, partially offset by start-up costs for new businesses.

Our guidance for the quarter reflected a net charge in the first quarter of $0.02, as a bulk of the escrow funds were planned to be received later in the year.

We continue to plan our start-up costs inclusive of the escrow release at $8 million for the year.

On the balance sheet, our inventories are very clean and on plan with the 21% increase over last year's levels.

The increase in inventory supports our planned sales increase in the second quarter of approximately 19%.

Our receivables are current and up 24% for the prior year reflecting the addition of the Superba neckwear business, which we acquired in January 2007, and the increase Calvin Klein's royalties for the first quarter.

We are projecting second quarter earnings of $0.61per share, which is a 15% improvement over the prior year.

Included in our guidance for the second quarter is a charge of $0.03 for start-up businesses Timberland and Calvin Klein Specialty Retail.

For the year, given our strong results for the first three months, we are raising our 2007 earnings per share guidance to a range of $3.06 to $3.10 from $3.00 to $3.06.

This equates to about a 17% to 18% improvement over the prior year.

Our revenues for the year are estimated at $2.41 billion, or an increase of 15%.

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

Thank you.

The question-and-answer session will be conducted electronically.

(OPERATOR INSTRUCTIONS) And we'll pause for just a moment to give everyone an opportunity to signal for questions.

We'll go first to Jennifer Black with Jennifer Black & Associates.

Good morning.

And congratulations on another great quarter.

Thanks, Jennifer.

I wondered, Manny, if you could talk about your -- just how the business is changing or not changing with the changing department store landscape?

And then if you could talk a little bit about what businesses maybe aren't doing as well?

You touched on a couple.

And do you see them being really resilient?

I'm trying to find opportunities.

Thanks.

Okay, Jennifer.

I think the obvious answer to the change that we're all dealing with in this consolidating environment is that over the last three years, and in particular with the May-Federated merger, we're dealing with fewer customers and much larger customers.

And it's -- as I've said in the past, it's really win big, lose big.

And that's why I believe it's critical we continue to invest in the marketing of our brands.

The biggest leverage we have with our customers is our brands and our brand strength.

So we continue to invest in those brands to make them more important to the consumer and ultimately to our customers.

So that's been the biggest change, dealing with the dynamics of all of the what's going on at retail.

It's critical that we continue to run a diversified brand strategy.

I think by having multiple brands to sell to multiple channels of distribution I think gives us the most flexibility to deal with the situation.

So that's our strategy.

It hasn't changed over the last 5 years.

It's probably become more important and more paramount with the consolidation that's gone on.

I touched on some of the businesses that had what I would characterize as a tough April.

I wouldn't even characterize it as a tough first quarter.

Through March, all of our sportswear businesses were performing very well.

We came into April and everyone saw the retail comp numbers for the retail channel and department stores in particular.

There was a lot of pressure in April.

Some of it was the calendar shift, but clearly a big piece of it had to do with unseasonable weather that was being dealt with.

But we've seen -- as you said it, we've seen a resiliency in our business.

We moved aggressively through the seasonal merchandise.

We marked it down.

We were very aggressive to move it out, make room for new product.

And we've seen -- we got a reaction to that price move and we've got reaction to our new deliveries in May, so we're feeling very positive about the business right now.

And we had to just deal with, as I would characterize it, from where I sit, as this one month blip we had to deal with to work through it.

We're feeling very good about the business as we go forward.

So basically all of your businesses are doing well?

At this point in time, our moderate sportswear business has had to deal with a very tough April, but as we've entered May, those businesses have all bounced back.

We feel good about it.

The environment that we're dealing with, our own retail stores, as I said, we're posting a 7% comp store increase the first three weeks of May and that's on a shifted basis matching up the calendar, so we feel very good about that.

Dealing with some of the softness we saw at retail, we seem to be outperforming brand, our brand-by-brand, category-by-category.

We seem, in general, at least to be performing at the store levels or we're exceeding those store department levels.

We feel good about where we're positioned and how we feel about the business.

This management team feels positive about it as we look forward.

Well, the merchandise looks great, thank you, and good luck.

We'll go next to Robert Ohmes of Banc of America.

Oh, thanks.

Good morning, guys.

Just a couple of quick questions.

On the Calvin Klein royalty guidance you guys gave, if you look at the last two quarters, obviously, way ahead of that sort of low double-digit growth, why won't it continue to run at that rate the next few quarters?

And then when you do start to anniversary the fourth quarter of last year, how are you thinking about that and how you keep the royalty growth going?

Thanks.

We're planning, I guess, the last three quarters of the year somewhere between 9% and 10% growth on a top line basis.

Could that be conservative particularly in the second and third quarter?

Maybe, and we could do better than that.

Our nature is to be conservative.

It is a licensing model.

So we don't have hands on.

Some of our larger categories are clearly benefiting from product launches, fragrance in particular.

I think we'll see strong performance through the second and third quarters.

We're going to be up against some really strong comparisons in fragrance second half of the year last year, or really up against for all the years.

We're clearly not going to keep it the same growth rate that we've seen now for the last two quarters with fragrance.

But I think it'll continue to be in the mid to high single-digits for a very large category.

On the jeans side, Warnaco talked about their business and they talked about it's clearly some of their improvement as they saw was timing.

So we factored that into our projections.

You have a better sense.

Could their projections be conservative?

I'm not sure.

When I look at them, there seems to be upside against the projections.

But we're only planning that business to be up in the mid single-digits for the balance of the year.

Some of that is clearly timing, some of that might be some conservative estimating.

Clearly in jeans and underwear, there were some timing benefits that we received for the first quarter.

The new -- we have a number of new launches.

We talked about dresses.

It's really been a category that's been very strong for us.

Our cosmetics launches in the fourth quarter of this -- third and fourth quarter of this year -- I wouldn't characterize it as a big -- revenue from a revenue point of view large, strategically it's very important for us and it's going to position us well as we go into 2008 and beyond.

A lot of marketing support goes along with that.

The continuation of launching new fragrance labels, the CKIN2U, which will now be followed in the third quarter with Calvin Klein Man, a new fragrance targeted towards men.

Clearly, Coty will be spending significantly more from a marketing point of view than they did this time last year.

So I think all of those things bode well for the Calvin Klein business and the continuation of those businesses.

Thanks.

And just a very quick follow-up.

Superba sounds like it's doing better than you planned.

Does that mean it'll be more accretive than $0.03 this year?

Yes, we think it could be.

I think probably at least $0.01 better than that.

And depending on what happens in third and fourth quarter how the tone of business goes and as it works through, and we hopefully realize the margin benefit earlier, it has the potential to do better than that.

And -- as we perform and do better, obviously, we'll continue to report that to you.

But we really feel very positive about it.

We don't see any downside there at all.

And there could be some upside.

Great.

Thanks a lot, Manny.

[OPERATOR INSTRUCTIONS] We'll go next to Robert Samuels, JPMorgan.

Hey, good morning, guys.

Manny, when you look at your business today, where do you think margins can get to in the CK licensing business and the overall Company?

Well, I guess from an operating margin point of view, I think the licensing business over the next two years could start to move towards a 50% rate.

So I feel that's a rate as we grow -- particularly, if we grow fast than the 10% target than we've given ourselves.

So I think last year we finished up for that segment of just under 45%.

So I feel over the next two to three years, that segment can start to report closer to 50% operating margin.

For the whole Company, again, I want to be -- just want to be, make sure we speak specifically.

When we talk about margins, I'm talking about operating income margins.

I think that they can clearly grow in 2008 and 2009 somewhere around 60 to 80 basis points a year, some of that driven by, a big portion of that will just be driven by the Calvin Klein piece of the business and the continued improvement in our wholesale businesses.

When you get to the gross -- as Mike has been talking about with all of our analysts, analysts and stockholders -- when you look at us this year, although we had strong gross margin overall improvement in the first quarter this year, that trend will change in the second, third, and fourth quarter of this year totally based on the mix of business.

Our wholesale business is growing significantly faster partially due, not partially, totally driven by the Superba acquisition, the women -- IZOD women's launch.

And those businesses carried lower overall gross margin and lower overall operating expenses.

So we would anticipate for the year a 70, 80-basis-point decline in gross margin with a 70 to 80 basis-point-improvement in SG&A leverage.

Our overall margins for the year right now are projecting relatively flat year-over-year and that's because we're carrying $8 million of net start-up costs, as well.

It's -- we think that model works for us.

Any updates on the retail rollout?

When you say retail rollout, are you talking about this Calvin Klein Specialty stores?

Yes.

The update is we're right on plan.

I had hoped to be able to say we signed X-number of leases.

But as the world of lease signing goes, we'll probably be in a position to announce something in the next week to two weeks about signing of leases and locations.

So we're very much on plan, merchandise flow and merchandise design right on plan.

We're very excited about the leases we seem to have secured and the position in some of the best malls of America.

So we're just excited about that whole launch.

We think it's going to be great for the brand from a positioning and marketing point of view.

And hopefully it'll turn to be a profit opportunity on a long-term basis for us.

So it's pretty exciting and we really feel good about it.

Great.

Thanks very much.

We'll go next to Omar Saad, Credit Suisse.

Thanks.

Good morning.

Good morning.

I wanted to kind of follow-up on an earlier question, when you look at the Calvin Klein licensing business, it's really been astonishing how much the legacy categories in that, for that brand have been driving the growth here, when do you think we could start to see some of the newer initiatives and more recent product launches and category launches start to take over the reigns, or take the baton and drive the growth in that business relative to what we've seen over the last couple of years?

Omar, when we talk about, when we plan our business, we plan the legacy businesses on average when we look at it to grow 3% to 4% a year.

It's more a comp store increase.

And if we do that, given the product launches that we've had, we're very comfortable talking about a 10% top line growth for Calvin Klein.

And that -- what we've been experiencing is significantly greater than that.

Through last year, the first three, four years that we've owned the brand it's been growing closer to 14% on the top line, and this year first quarter it grew 37% and we're targeting right now to grow probably over 15% for this year when we look at it.

It's clearly -- that growth is much more being levered by the existing businesses.

And when we talk about some of the existing businesses, particularly when we talk about jeans and we talk about underwear, there is a substantial amount of growth going on internationally in countries, and expansion in countries that two or three years ago we had a very minor presence in.

If you just look at China as an example, today between jeans, underwear, and sportswear, we have over 50 stores in mainland China.

That growth we'd expect to continue to grow as Warnaco and its partners continue to open stores there.

So we don't see -- we see the legacy businesses continuing to grow.

We try not to get too far ahead of our growth targets.

That's why we continue to talk about top line growth for the balance of this year 9% to 10%.

If it's greater than that, obviously, with the licensing model we'll capture that.

The new initiatives are clearly kicking in.

But when you're starting from a zero base, or even a base of relatively small, even as these exceed these kinds of numbers, given the strength of fragrance, jeans, and underwear, it's not as visible as you would expect it to be because of such strength of some of those legacy businesses.

Okay.

That's helpful.

And kind of a minutiae question on the Calvin Klein, as we try to look at the performance of that business.

In terms of the profitability, is it appropriate to look at the kind of EBIT contribution from Calvin Klein licensing relative to just the royalty revenues as opposed to the royalty revenues plus the advertising revenues?

Or should we look at it as a whole?

Really just the revenues.

The advertising, Omar, goes in and comes out.

So other than sometimes, there are some timing issues.

But other than when there's timing, it's based purely on the revenues.

So if I kind of look at this quarter verses last year this quarter, this quarter, if you back out the $3 million kind of gain, you earn $27 million on a $45 million total royalty number versus last year $18.5 million on a $33 million number.

That's a -- I think that kind of goes from something in the 40s to something in closer to 60?

That's correct.

The advertising, it's an accounting -- we are forced to account for it that way.

We're forced to show it as revenues and we do show it down below.

You are correct.

To me, it looks like you did get a lot of leverage in that business and the underlying business if you take away the advertising and the profitability in that business really did improve significantly on a 37% growth number?

Absolutely.

Okay.

Clearly, we've seen that now for three years.

As we -- as we exceed our -- we've targeted generally 10% top line growth just round numbers and 20% bottom line growth.

But as you incrementally add two or three points on top of that and we've averaged close to 14% growth, the bottom line growth has been more closer to 30% for us.

Yes.

You clearly get dramatic leverage on the incremental sales volume.

Yes, it helps to clarify that if you kind of exclude the advertising piece of it.

You watch us very closely, but it's something we try to really impress upon people.

It's great we're collecting this advertising revenue, but it's truly an in and out.

And the real way to look at the business is to watch the growth of the royalty revenue.

And if you would exclude the revenue, the advertising revenue, this model works much closer to 65% to 70% margin.

Yes.

When it's netted, so it's a very profitable business model and we're very happy with it.

Yes.

And one last question, Manny.

As you kind of look at capital allocation and where you want to invest it, it's obvious kind of with, I think you're targeting $11 million behind the Timberland and the retail stores.

How do you feel about what are some of the highest return opportunities for you as you look at your cash, which continues to build a little bit between the CapEx, the increased CapEx this year and some of the investment behind these new initiatives versus kind of other capital structure type issues like share repurchase and potential debt pay down?

Well, I guess -- we've really been very consistent with that.

We're overspent, we've doubled our CapEx expenditure this year, $100 million.

That was really twofold to invest in the growth initiatives and to really invest so that we can continue the growth in the legacy business.

We've had such strong growth, we're really just playing some catchup now with our infrastructure to support the growth that we have experienced and we're projected to experience in the future.

But even with all of that, we're still a very cash flow positive Company.

We're going to generate this year, I think our guidance book is about $85 million to $90 million of free cash flow even after this substantial increase in CapEx.

So clearly we can't -- even investing in all of the growth, internal growth initiatives we have, high return businesses we're very much a cash generator.

Our first priority continues to be acquisitions that we can layer on to our business model.

Our hope would be to layer in incremental brands that fit into our strategy.

This multi-brand, multi-channel strategy that I touched on.

But if that doesn't pan out, we would look at our capital structure.

Likely place to be is to buy back stock.

When you look at our debt to equity ratio, we're very underlevered as a Company.

When you look at our net debt to capital ratio, we're actually -- we're going to end this year in a negative position and it will be in a net cash position.

So we're substantially underlevered.

And that's really been a direct result of our performance.

And we're now looking at our capital structure.

And over the next two quarters, if there's not an eminent acquisition, I'm sure we'll do something to address that.

Excellent.

Thanks.

Great job, guys.

We'll go next to Bob Drbul, Lehman Brothers.

Hi, good morning.

Question that I have is on the Calvin Klein men's sportswear business, can you give us an update on in-store shops, the number, the square footage, and your expectations and where you're going to be on '07 for the full year now?

Yes, we are -- we ended last year with about 500 shops.

We're planning to end this year with about 575 shops.

We're, Federated is a big piece of that growth.

And will continue to be.

Besides the shop growth, we're also adding square footage.

And I guess our overall square footage on -- when you look at an annualized basis with the shops coming on, a lot of those shops coming on third and fourth quarter, I guess our annualized square footage will grow well over 10%.

And end of year, to end of year basis will probably be closer to 15%.

Okay.

And quick question on the outlet business, were there any trends that you could discern by name plate or geographies over the last few months that you would call out, Manny?

I guess I would make two comments there.

Our Calvin Klein business is putting up double-digit comp store increases.

Our PVH legacy businesses are putting up strong single-digit comp store increases on or ahead of planned targets at PVH legacy with better gross margins across the board.

From a geographic point of view, I guess the only thing I would call out is that the Southeast, Florida in particular, has been a soft market for us in general.

Both Florida, Puerto Rico, that whole area, which is a big piece for us.

And the Midwest, up until just recently, was a softer piece of our business.

But the Northeast very strong, the West Coast overall has been strong.

So we feel good about that portion of it.

Geographically, it's hard for me to read too much into that.

If I was going to, what we believe is if there's a real estate market that's probably been more negatively impacted than most, it's probably been Florida.

And I think there's been some ripple effect with that, both from a travel point of view down to Florida and maybe from a consumer point of view.

But again, that's not concrete, Bob, that's just a little bit of "mother-in-law" survey.

All right.

Thank you.

We'll go next to Melissa Otto, WR Hambrecht.

Hi, congratulations on a great quarter.

Thank you.

Just a couple of questions.

Would like to get a little bit more color on what's going on in the Far East.

Could you give us some specifics around the launch and any sort of data points that can give us just an idea of the productivity going on out there?

Well, again, the Far East has been a big, for both Calvin Klein, CK sportswear and for jeans and underwear.

Asia has been a strong growth vehicle for us.

It continues to be.

We continue that.

Last year we added overall Calvin Klein stores just about in round numbers 100 stores.

We'll probably add a similar number this year, that's between Europe and Asia.

And we're feeling positive about that.

We think it's -- it's a great way to get to the consumer, it's a great way to present our products in the most cohesive way.

And the nice -- when we look at the Calvin Klein business, when we bought the business it was basically 50% international, 50% domestic.

With all the growth that we've experienced, when we look at the business today it's about 50% domestic, 50% international.

So it was a very balanced growth story for us that's gone on with Calvin Klein.

And I think that's about as clear a picture as I can give of the business at this point in time.

Okay.

Fair enough.

Any idea how big that business could become?

Is there -- I know that you guys don't manage all of it, but is there some sentiment internally that can give us a [guesstimate] in terms of the size of it?

Melissa, I hesitate to try and break it down geographically for us.

We think when we talk about the brand and we talk about it as it compares to some of the other brands, we think there's another $2 billion to $3 billion of growth in the brand.

We think half of that will come internationally and a big piece of that will be delivered by Asia.

The big opportunity continues to be sportswear and accessories, footwear, apparel and accessories.

Internationally for us that's the CK sportswear line.

Warnaco operates that for us in Europe.

Club 21, who is the Armani AX licensing partner, operates that business for us throughout Asia.

And it's just very -- they have very aggressive growth plans and a big portion of that surrounds retail.

So we feel very good about that business.

It's well ahead of plan over the last two years and continues as we go forward.

Okay.

Great.

So I guess in terms of pulling it all together, that makes a 50/50.

50 international, 50 U.S., will stay very much intact over the next two years?

I think that's correct.

We'll continue to see strong growth in the U.S.

market.

And we see strong growth internationally.

Great.

Thank you very much.

And congratulations once again.

Thank you.

We'll go next to Brad Stephens, Morgan Keegan.

Hi, this Danna Getske on behalf of Brad Stephens.

Congratulations on another outstanding quarter.

We have two questions.

The first one, are you seeing any substantial increase in product or distribution or transportation costs that would impact margins going forward?

And secondly, we just saw today that Ralph Lauren now operates 145 outlet stores.

Is it fair to assume that ultimately that's a more appropriate goal for CK outlet stores rather than a stated goal of 85 (inaudible) stores?

Thanks.

Okay, two things.

The freight, transportation costs, something we are constantly looking at, whatever.

We don't believe it's going to have any dramatic impact to our business.

And let's just leave it at that.

It's something we're very close to.

We monitor very closely.

We have some long-term contracts with our carriers that would make us comfortable about how we project out the business, at least for the next two quarters.

On the outlet business, no, I would not -- I understand that Ralph Lauren does operate 145 stores.

That's appropriate for them, that's appropriate for them.

We don't want to be as widely distributed.

We think it's more appropriate to be in the best centers, and not some of the more moderate centers for our brand and we want to be more selective as we open those stores.

We're very cautious about protecting our brand integrity with Calvin Klein and we only want to be where true designers are, and some of the centers that Ralph is in, just not, we don't believe are appropriate for Calvin Klein.

Okay.

Great.

Thanks very much.

We'll go next to Clark Orsky, KDP Asset Management.

Yes, I just got a question on the CapEx.

Can you talk about sort of where the increased spending is going?

Sort of more specifically?

Sure.

We've identified a few different areas.

We've talked about $100 million with historical CapEx being about $50 million.

And what we're doing is we're spending on systems, infrastructure, we're talking about expansion of the warehouse facility.

Also we're building out additional office space for every office we operate throughout the world.

So our Hong Kong office is basically doubled in size, we're adding space to our New York offices as well as our back office facilities in New Jersey.

A lot of it is going towards office renovation and buildouts.

Okay.

I had a couple other smaller questions.

Can you tell me what D&A was for the quarter and gross interest expense?

Depreciation and amortization for the quarter was about $11 million.

Okay.

And --

Gross interest, I'm trying to dig it out.

About $8 million to $8.5 million.

Okay.

And then as far as your comment about addressing the underlevered balance sheet, were you talking mostly about buying back stock or dividends or something else?

In terms of addressing that situation?

Without -- without making any specificity, what I was talking about was potentially buying back stock.

What I really was talking about was looking at our balance sheet and our capital structure.

And when I do that, I -- and you look at our debt level at $400 million and our cash position at the end of the year projected to be $450 million, I feel that when you look at that on any level was substantially underlevered.

I would think it would be more appropriate for us given our capital structure to really focus in on a stock buy back as opposed to potentially a dividend, special dividend at this point.

We're looking at all the options and we haven't made any decisions at this point in time.

But just to try and share with you some of our thinking, that's where we're thinking at this point in time.

Okay.

I appreciate it.

Thanks.

We'll go next to Andrew Berg, Post Advisory Group.

My question's asked and answered, thank you.

Thank you.

We'll go to David Glick, Buckingham Research.

Good morning, and I'll add my congratulations, as well, to the team.

Manny, you had described earlier in the call that the department store environment is one where there are big wins and big losses.

Clearly, you have a great relationship with JCPenney as you do with all your major retail partners.

That seems to be one of the real core strengths of your management team and your Company.

As you look at the landscape changing at Penney's, with the American Living launch, can you give us some color on some of the proactive steps you're taking to hold onto, if not grow your market share there in the face of that kind of landscape changing there with that big of a launch?

I'm just going to ask Allen Sirkin to answer that, he's so close to it.

Sure.

Hi, Dave.

How you doing, Allen?

Okay.

We've spent a lot of time with the JCPenney, in particular, senior management down through the buying organizations.

For the last number of years, we've been intensifying our position around our core brands, IZOD and Van Heusen, and very successfully have developed a customer following through the JCPenney stores.

We continue to invest in shops and pull together presentations and intensifying our point-of-sale marketing.

We support that with our store people.

We have met with them.

And we are comfortable that the juxtaposition of American Living to our brands is a juxtaposition that they don't occupy the same space, nor the same consumer even though we all vie for consumers every day.

They have laid out a strategy for us that clearly defines the breadth of their consumer reach and the role that American Living plays.

And I think we will be able to coexist and be successful within that.

We are budgeted up and performing up at Penney's.

It's been a growth relationship for both parties, and we're very pleased to be part of their assortment.

Great.

Allen, that's real helpful.

Can I interpret what you're saying?

Typically you walk into a Penney's store today and in the men's area in the mall entrance, and you look to your right and there's IZOD kind of leading off the traditional men's sportswear presentation.

So you're operating on the understanding that that positioning won't change going forward?

That is our understanding.

Great.

Mike, and just a quick follow-up for you.

Can you give us a sense for how the start-up expenses for Timberland and women's IZOD flow through the balance of the year by quarter?

You gave us Q2, but if you can give us some color on the balance of the year, that'd be helpful?

Yes, what we talked about was the start-up cost for the balance of the year being about even.

Even.

Okay.

I missed that, sorry, thank you very much.

Good luck, guys.

We'll take our final question from Susan Sansbury, Miller Tabak.

I know everybody wants to go home.

But, Allen, your comments sparked a question in my mind.

What do you mean exactly -- I don't know if you know, I broke my leg in January, haven't been able to do a lot of channel checking, what do you mean by the fact that IZOD and Van Heusen don't occupy the same space at JCPenney, or customer that JCPenney is looking for for the American Living launch?

I think when you talk about brand DNAs and profiles, IZOD is a youthful, spirited, active inspired brand.

Van Heusen is a little more of a -- a little more dress casual brand.

American Living will sit alongside it, according to Penney's definitions, which they've been very vocal about, there are four brands that will occupy a lot of space.

It is IZOD, it is Van Heusen, it is [Liz and Co.], and it is American Living supported with the rest of their private label strategy of Stafford and the other brands that they run.

They seem comfortable that that diversity and brand DNAs attracts a large swath of customers and we reside well within that assortment as does the other two people I mentioned.

So we're comfortable that we all compete for consumers, but brand DNAs define who your ultimate consumer will be.

And Manny, I have a question for you.

When you say that incrementally there's still $2 billion to $3 billion of retail potential in front of us for Calvin Klein, can you refresh my memory about what time frame you're talking about, number one, and where you expect to end this year with the Calvin Klein global retail?

Okay.

We ended last year with about $4.4 billion in global retail sales for Calvin Klein.

We're expecting this year to be approximately $5 billion in global retail sales.

We think the number over the next, over next, over a four to five-year period that we approach $7 billion.

So that's a number that we think is, when we look at it very reasonable given some of the other brand players that are out there and the strength of their brands vis a vis the strength of the Calvin Klein brand, and given the categories that we are in today, that we feel is are underdeveloped and categories that are launching or just beginning to launch, that have just begun to launch that we feel -- it's very sustainable growth.

Okay.

That's great.

You're doing a great job.

Thanks very much.

Thank you very much.

And I guess with that we'll close the conference call.

I'd like to thank everyone for joining us.

And we look forward to speaking to you again on our second quarter conference call in August.

Thanks very much.

Have a good day.

Once again, that will conclude our teleconference for today.

Thank you all for your participation.

Have a wonderful day.