PVH Corp (PVH) 2008 Q3 法說會逐字稿

Good day everyone, and welcome to today's Phillips-Van Heusen Corporation's, third quarter 2008 earnings release conference call.

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 PBH'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 foward-looking statements which reflect PBH's view of future events and fiinancial performance as of November 18, 2008.

Any such foward-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 its SEC filings.

The company does not undertake any obligation to update publicly any foward-looking statements including, without limitation, any estimate regarding revenues or earnings.

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

A reconciliation of these measures is included in the company's earnings release, which can be found on the company's website at 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 for opening remarks and introductions, I would like to turn the call over to PVH's Chairman and Cheif Executive Officer, Emanuel Chirico.

Please go ahead, sir.

Thank you very much.

Good morning, everyone.

Joining me on this call this morning is Mike Shaffer, our Chief Financial Officer, Ann Wooken, our Treasurer and Director of Investor Relations, Ken Duane, our Vice Chairman of Wholesale, and traveling during this time, trying to do some things outside the office is Allen Sirkin, who is President, so he won't be with us this morning.

Given our third quarter results and given the environment, we are particularly pleased with the -- our approximater performance in the third quarter.

Mike will quantify the financial results for the third quarter after my comments.

I am going to try to put some color and perspectives onto each of our business segments, both their third quarter financial performance and then also give you a sense how we are planning each of these businesses for the fourth quarter.

Let me start with Calvin Klein licensing.

In the third quarter, for the first two months of the quarter, August and September, business continued to run ahead of our planned rate of 10% growth.

For the first two months, Calvin Klein licensing business was running ahead in the mid teens area.

That's pretty much where we were running for the first half of the year as well.

However, given the global economic pressures that are occurring around the world, that is growth decelerated in August to the mid single digit range.

On a local currency basis, our European business slowed to the low single digit range, while in the Asian markets, our growth slowed to the mid to high single digit range.

Our licensing revenues in the quarter were also negatively impacted by about $1 million for foreign currency translation which represents about 2% of overall royalties.

So overall in the third quarter, Calvin Klein royalty revenues grew about 8% and on a constant dollar basis, was ahead of about 10%.

As we look into the fourth quarter, we are planning the licensing business off of our October trends and early November trends.

Overall, we are planning the business to grow on a constant dollar basis, in the mid single digit range.

We anticipate that foreign currencies will negatively impact our licensing revenue in the fourth quarter by between $3 million to $3.5 million.

Given those factors, we are basically planning for the fourth quarter and licensing revenues at Calvin Klein will be flat.

Let me try to put into perspective the impact of foreign currencies on our business.

Overall, in the Calvin Klein licensing business, a little bit over $100 million of our revenues are generated outside the United States and about $80 million of our businesses are impacted -- of those international businesses are impacted by foreign currency translation.

So we have $80 million that are being impacted by that business.

Given we have foreign currencies are today, and when we look at our total basket of currencies that impact our businesses, we are anticipating for the next 12 months, that our business will be impacted negatively 15% to 20% on that $80 million of business.

So to put that in a range, we are anticipating our Calvin Klein licensing revenues to be negatively impacted $12 million to $16 million over the next 12 months.

That 12 month period begins November 1, 2008 through October 1, 2009.

So, that is how we derive about a $3 million to $3.5 million impact in the fourth quarter of this year.

Looking at our most significant licensing products in Calvin Klein, we continue to have very strong performance both in jeans and underwear category.

We very successfully launched our new women's underwear product, Seductive Comfort.

We had very strong selling and positioning at department stores in the United States and throughout the world and our sell-through on this product has also been very strong.

On the fragrance side of the business, our international business continued strong but our US business has been under more pressure.

In the US, our principle channel of distribution at high end department stores were being directly impacted by the overall economic environment, and we have seen a slow down in the fragrance business in the US, commensurate with the type of comps you are seeing in US department stores.

In the US, our licensing partner G 3 is continuing to post strong sales in the mens and womens outerwear category as well as strong results in the women's dress business.

Both of these categories continue to run well ahead of plan.

We are also continuing to see strong performance in our men's tailored clothingbusiness with our licensing (inaudible).

Moving to our wholesale business, our overall sales at wholesale grew about 3.5% in the quarter.

We continue to post very strong results in our dress furnishing business.

On the sportswear side of the business, our moderate national brands, Arrow, IZOD and Van Heusen are performing very well in this competitive environment We have seen the moderate brands, given their price positioning and aggresive promotional cadence, work very well for us at department stores.

We have been very aggressive from an inventory positioning point of view, and that has helped our margins, particularly in the fourth quarter.

In the fourth quarter, we are very being aggressive in order to move inventories now and get them on plan coming out of the holiday season.

We are not waiting and we have provided for significant margin support in the fourth quarter -- in our fourth quarter estimate to make sure inventory levels coming clean for the beginning of the spring season, starting in the end of January.

Moving to our retail business, our comps for the third quarter were minus 5% overall with our heritage businesses running at about minus 7% and Calvin Klein running at about plus 2%.

For the third quarter when we look at our retail business the it is really a tale of two cities.

The first six months of the quarter for the third quarter, our comps in all our businesses were running ahead of plan and were exceeding all of our estimates.

That trend changed considerably with the start -- with the middle of September, on through the current period now.

Given the current trend in our retail business today, we are planning this -- our retail business at a minus 9% to a minus 13% comp for the fourth quarter.

We have also planned for significant markdowns in the fourth quarter, because we know the environment it is going to be very promotional and we want to make sure we end the year clean.

Ask so that we -- and underplan from an inventory point of view, because we think that puts us in the best position for 2009.

Looking out into 2009, we -- and looking at the environment, we continue to think the trends we see today will continue into 2009.

We are aggresively looking at our operatoring structure, we are aggressively looking at our operating expenses and we will look to be aggressive from the point of view of seeing how we can potentially save money going forward, and we are leaving no stone unturned.

We are also focused very strongly, as I said, on inventories and we will make sure we end the year as clean as possible.

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

Thanks, Manny.

The comments I'm about to make include non-GAAP results and comparisons resulted from the Geoffrey Beene outlet store shut down.

I refer you to our press release for the identification and reconciliation to non-GAAP measures.

Revenues for the quarter were $727 million, a 4% increase over the prior year.

Our Calvin Klein licensing business grew 9% over the prior year, even in this difficult environment.

Our wholesale and retail businesses grew 3% over the prior year with our dress furnishings business up 7% for the quarter and our sportswear business posting a 0.5% increase in revenue over the prior year.

The outlet business was the most difficult business in the quarter with the comp store sales decline of minus 5%.

Our heritage brand outlets were minus 7% for the quarter while the Calvin Klein outlets were plus 1% for the quarter.

Gross margin for the quarter was 47.8%, a 60 basis point improvement over the prior year.

Driving this improvement was mix of business as Calvin Klein licensing grew faster than our other businesses and carries a 100% gross margin.

We also experienced gains in our gross margin rates and our combined wholesale business, which was partially offset by declines in our outlet business.

Expenses for the quarter were on plan at 34.6% of revenues, which was a 210 basis point increase over the prior year.

This increase in expense was primarily driven by a $9 million shuift in advertising from the fourth quarter to the third quarter and included ad spend primarily associated with the Calvin Klein 40th anniversary.

Earnings per share for the quarter was $1.10 versus concensus estimate of $1.07 and prior year at $1.05.

Considering the difficult environment and the shift in advertising expense, we were pleased with the 5% increase.

I wanted to take a minute to talk about the strength of our balance sheet.

For the quarter, our inventories were down 1% from the prior year including new businesses.

Excluding the inventories for new businesses, our inventories were down 8% to the prior year.

Trade receivables, while up 14% were $37 million to the prior year, showed no slowdown in collections, and they're as clean as the prior year in terms of invoices and deductions.

Excluding new business receivables at $28 million and the increase in receivables associated with Calvin Klein licensing of $9 million, our receivables are flat for 2008 versus 2007.

The receivables for the Calvin Klein licensing business were up as a result of the growth from the Calvin Klein licensing business and are in line with the revenue increase we experienced for the quarter.

Receivables associated with the licensing business have been collected subsequent to end of the quarter.

We will end the year with approximately $340 million of cash, and we expect to generate approximately $70 million of cash in 2008.

Our revolver, which does not expire until 2012, has only letters of credit drawn against it.

We do not plan on drawing down on the revolver other than for letters of credit.

Availability on the revolver is generally between $190 million and $200 million in each quarter.

Our long-term debt, which totals $400 million, has no maturities before 2011.

Overall, we have a strong balance sheet with significant availability, liquidity to fund our businesses and growth opportunities.

Let's move on to guidance.

We have revised our fourth quarter and full-year guidance.

For the year, we are looking for earnings approximate per share of $3 to $3.10 and for fourth quarter, earnings per share of $0.35 to $0.45.

Revenues for the year are projected at $2.51 billion to $2.53 billion, or 3% to 4% greater than last year.

Revenues for quarter are planned at $595 million to $615 million, or 2% to 5% greater than the prior year.

And with that, we will open it up for questions.

Thank you.

(Operator instructions) We will pause for just a moment.

Our first question will come from Chi Lee with Morgan Stanley.

Hi, good morning, guys.

Specific on the retail operation, you discussed any regions that you saw greater rates duration, the way we talk about those regions that had benefiting from traffic.

I guess there -- from a geographic point of view, and it really hasn't changed from the quarter point of view, is the Florida business has been our toughest category, and southern California has also been our toughest geographic area.

What has dramatically changed over the last two months has been our border stores, what we tend to talk about, any of the stores bordering -- the Mexico or bordering Canada where while the dollar was as strong as it was, we were seeing very strong comp store performance out of those stores, we also saw a strong performance in Las Vegas and in some of the New York region areas also because of international tourism.

With the strengthening of the dollar, that really started to slow down beginning in October and it continued into November.

So that has been the most significant change that we see in our business, and it is probably -- in the tourism portion of the business has probably impacted our Calvin Klein retail business more that dramatically than our more moderate brands.

Great.

And the 20%, Mike, impact foreign exchange, that just assumes current spot rates stay flat through next year?

Flat to slightly down, but basically flat to where we are right now.

Okay.

Thank you.

Our next question will come from Robbie Ohmes with Merrill Lynch.

Hi there, Manny.

I had maybe a little bit larger picture question.

Given the change in your outlook heading into 2009 and sort of the view that the US is going remain real tough and the department store is going to remain tough.

Can you walk us through how -- what kind of role Phillips-Van Heusen plays if there does end up being hundreds of department stores being closed in this tough environment in '09 and what type of markdown money support you have to give in that process and how you plan for that?

Thanks.

Sure.

I guess when you look at, historically, the way we have always treated store closings is first and foremost, there's usually announcement about store programming, then as you look out, it is usually six to 12 months out from the actual stores liquidating close.

We usually plan very aggressively for that with our retail partners to get inventories as low as possible in those categories.

In addition, what we usually do is we work out a selling price going in where we don't provide a significant margin support on the back end, where we will give them a better price going in, we will factor in an allowance rate that makes sense and sell into that channel into those stores as appropriate.

So we are are not exposed from a margin point of view on, from a liquidation point of view.

In addition, what you tend to do is you tend to put in more basic product into those stores and you don't tend to flood it with more fashion, and you really try to mitigate against your markdown exposure.

The stores do that and we do the same.

So it has not been a problem for us working through store closings with our retail partners, just from a margin support point of view as long as you had some planning that you could factor into that, read that as three to six months.

And then just a quick follow up Manny, the strength of the IZOD and Van Heusen wholesale business, can you sort of comment on how the more moderate brands look for spring '09 in terms of how you think backlogs will shape out, and do you see a situation where moderate brands like IZOD and Van Heusen are gaining share from private label, or is it higher price point brands that they could gain floor space from.

Just your outlook into '09 on that would be great.

Let me just put into perspective.

Going into '09, I think, as you talk to most retailers, I believe they're planning their spring business anywhere from 5% to 10% down depending on where the trends are right now, and and clearly, they're planning their open to buy in that light.

So with that as a backdrop, I believe that our national brands that really deliver value are gaining market share in the channels and distribution that we perform in.

But putting into context of a 5% to 10% decline in open to buy, we are still planning those businesses down in the first half of 2009.

As we're going into it, we are planning inventories tight and we are not trying to take any exposure from that point of view.

Clearly, I think when you talk to most retailers and they talk about what is working, it is really about a value proposition and national brands opening to -- opening price points tend to do well in an environment like this on a relative basis, and you are finding that both with our three brands, Arrow, Phillips-Van Heusen and IZOD.

Great.

Thank you very much.

We will go next to Jennifer Black with Jennifer Black and associates.

Good morning, and congratulations in a really tough environment.

I wondered if you could talk about your raw material costs.

I know that raw material costs went up and now they're coming down.

Does that leave any upside with margins, and also, can you speak to that same question in regards to overall sourcing and the factories, and then I have a follow up question.

Okay.

From a product cost point of view, I guess three to four months ago, there was a lot of noise about increased prices.

We have seen a real pull back on that.

In the spring season, we are seeing raw material costs up about 3% and as we look to fall, we are actually seeing that pull back.

So again, the type of pressures that we were talking about with the strengthening of the dollar in particular and with charges coming down, commodity prices, a lot of that pressure has been taken off.

Does that create a gross margin opportunity?

Only if we get -- only if inventories are back in line overall, as we go into the spring and into the fall selling season.

So I believe, yes, there's opportunities on initial margins to be higher, but the potential for clearance mark downs is really going to be how well we and then the industry manages inventories going forward, because the deterioration that we seen this year in our gross margins are all being driven about, constantly trying to get our inventories back and right sized in line with what the sales demand is currently operating at.

So every time we bring our inventories down and we think they're in line with sales projections, the actual sales this is year have consistently been below projected results at retail.

That is going to be the bigger driver next year, getting inventories right sized, managing gross margins overall, both our margin support and in our own stores on mark down rates.

Okay, great.

And then I know that you planned your outlet business down significantly, and I wondered if this is a traffic issue, a conversion issue, or both.

Any thoughts on traffic in your other channels of distribution as well as our outlet business.

Well, from the evidence that we have seen, we have -- in about 50% of our stores, we have consumer counters in the store, customer counters, and our traffic rates are down, are in excess of our actual comp store performance.

So, from a conversion point of view, we are actually converting at a higher rate, and our AURs are basically flat to down just slightly.

So, it is really 100% being driven by traffic in the outlet environment overall.

In addition, the I believe, my sense is that department stores, at chain stores, it is also predominantly the traffic issue.

There is some erosion on AUR, but I think 90% of the retail comp store trend that you see negative comp store trend going on, is being driven by traffic at this point.

Okay.

And then lastly, Timberland, do you have any further comment?

No, we sold in.

I think we are learning a lot.

There is demand for the product.

There is -- consumer likes the product.

What we are learning is that the -- at shopper price points, at key item price points, that product performs very, very well for us.

So we are going to continue to be aggressive on our positioning of that brand, putting it in line with where the footwear is priced as well, not trying to price it at collection prices, but price it slightly below that and really create a value equation for that customer, and we think given our sourcing base, we have got the ability to really deliver against that, particularly into next year.

Great.

Good luck.

Thank you.

We will go next to Emily Shanks with Barclays Capital.

Hi, good morning.

Can you give us what the depreciation and amortization was for the quarter, please?

For the quarter, it was about $14 million.

Great.

Then in terms of the updated guidance around CapEx, it looks like prior guidance was for $90 million.

This press release indicates CapEx plus acquisitions of about $100 million.

How should we think about what the actual CapEx number is for this year, ie, excluding acquisitions?

Excluding the acquisition, we are looking at about $85 million to $90 million of pure CapEx.

Okay.

Is that a fair run rate for next year as well?

Yes, I think that number will be 50% of -- will be between $45 million and $50 million next year.

Okay, great.

And then just one last question, do you utilize factoring at all?

No.

Okay.

And are you required to get insurance for any of the guys that you sell into?

No.

Okay.

Thank you.

(Operator instructions).

Our next question will come from Jeff Klinefelter with Piper Jaffray.

Yes.

A couple of questions.

Manny, first of all on the outlet store division, how do you feel today given the current viability and what might be a prolonged depression of spending trends in terms of the total number of stores, where they're located, the cost of running those stores and the risk to margins?

Could you just touch on that a little bit?

What are the lease terms and what are your opportunities to right size further if you decide to do that?

Well, in the outlet environment, we have good flexibility with our store base.

I think our average term tends to be between 24 and 30 months.

So I think it is not like wall based stores.

Secondarily, given the comp trend that we had this year, if you look at our legacy business, I guess our comp trend for the year depending on where we end the fourth quarter, it is between minus 6 and minus 7.

With that kind of a comp trend, stores that were profitable now are marginally profitable, and it puts pressure on those stores.

If next year is also -- if next year is going to be a negative comp store year as well, it puts more pressure on those stores, to say the obvious.

So clearly, I think part of our fourth quarter review will be looking at that real estate portfolio.

I think our decision with the Geoffrey Beene stores, to close them at the first half of the year, make that decision, negotiate our way out of that and to convert about 20% to 25% of that chain to Calvin Klein stores was -- that decision looks even better today than it looked then.

So I think that positions us well, and I think we are going be very aggressive on the store base as we go forward.

Put in perspective, could you tell us again what is overall operating contribution of the outlets this year, estimated now with this new fourth quarter guidance versus the overall corporate average out margin?

Is that dilutive to margins?

It is clearly always, just to put into perspective, our retail business always has been under the corporate average, just on leaving licensing out of it, which clearly just skews everything with its 50% margin, but if you look at it, it is our least performing business.

Now, in good times, 2005, 2006 and 2007, our operating margins were between 8% and 10%.

In this tougher environment, our operating margins will be below 5% in those retail stores this year.

I believe as we look forward next year, just from a conceptual point of view, not a guidance point of view, but from a conceptual point of view, if the inventories are right sized and we get our inventory positioned appropriately to match up with sales expectations, there's opportunity for anywhere from 100 to 200 basis point improvement in gross margin in those stores no matter what the comp store trend is.

So if we can get that right sized, that could mitigate the potential deleveraging on SG&A line with the comp store trends.

Manny, outside of a top line improvement, can you just remind us the strategic importance from our perspective of having that outlet division for your overall business?

You know Jeff, I think it's always provided us with the mechanism to liquidate inventories when we have trouble.

We have used that throughout this year to keep our brands clean and to keep our brands from going into poor channels of distribution.

It is also -- it has been a profit contributor in reasonable times, 8%, if you look at it, even at the low end, an 8% operating margin, we turn our asset -- net assets about 4 to 5 times on pretax basis, we earn a return on investment that is about 40%.

That is a good return business for us.

It's not as strong as our wholesale business would have an ROI that's between 80% and 100% but those are good returning businesses and one of the reasons why we as a company generate so much cash flow.

So it has -- it clearly has a strategic value, but I think one could argue does it need to be as large as it is, and we have been taking steps to shrink the base and we will continue to look at opportunities to shrink that base.

Okay.

Just one last thing, I don't know if you mentioned this earlier, I got on a couple of minutes late.

In terms of the cash build, clearly, that's a great advantage at this point.

In term of making the most efficient use of that cash build, current thoughts given the market place acquisition versus buy back or other uses for that cash?

Look Jeff, it is no change.

I will -- on that front.

Our focus will continue first and foremost beyond acquisitions.

I think in an environment like this, you even have to be more prudent about acquisitions and not only do they have to be accretive and deliver value, but they have to be strategic as well.

Also, I think in an environment like this, cash is king can.

I think we are going to -- next 2009, we are going hear a significant amount of horror stories about our customers potentially, about other industries, about competitors, that are running into liquidity issues, be that tripping covenants, be that maturities debt coming due, so I think in this type of environment, our balance sheet is one of our biggest strength.

I think before I use that to go out and buy $150 million in stock, I would have to be comfortable that the credit markets are operating efficiently, that we are back to some level of normalcy in that environment before I go out and buy back stock, even though I know what a good buy our stock is, even though I know how accretive a stock buy back would be for us in short term.

I think the priority is to -- is our capital structure in our financial position going forward.

And until the world settles down, I don't want to put that at risk.

Okay.

Makes sense.

Thanks a lot.

We will go to Kate McShane next with Citi.

Hi, good morning.

Morning.

This kind of goes back to the question that was asked earlier in the call, but I was wondering if you could give a little bit more perspective on how much retailers are helping with mark downs.

Are you seeing more support in this environment or less?

I think Kate, I am not going to get into negotiations and discussion,s but I think Kate, I would look at it this way.

We have always been strong partners for our retailers and will continue to support them.

And we are going to support them into the forth quarter where we have margin understandings with them, and we are going work our way through it on both hands.

We are in constant discussion with them.

If they're playing by all of the rules, taking the goods, pulling the goods out as appropriate, not overly promoting the goods with coupons or whatever, we are going to stand by them and deliver our results for that.

If they're breaking some of the rules, we are going to have some discussions with them about pulling back somewhat, but I think on balance, it is business as usual, and anybody who tells you different, I think is just not being a good partner.

Okay.

And then, I know you are not giving guidance for 2009, but I was wondering if there has been any new product launches announced for Calvin Klein for next year and if so, what does that pipeline look like.

Next year there will be -- we have a planned fragrance launch for the second half of the year.

It hasn't been announced, the details of that and again, I won't get into that, but that always is exciting both from the point of view for the brand and from a performance point of view.

The cosmetics business has just gotten started this year, we expect it to accelerate next year.

We have furniture going in this year, and we believe that could be positive, some areas of home.

So it is a continuation of the pipeline and it's also a continuation of some of the programs that have launched over the last two years that is building up on a door basis and our presence around the world.

Okay.

Thanks very much.

You're welcome.

Omar Saad with Credit Suisse has our next question.

Thanks.

Good morning.

Good morning.

Thanks for laying out the specifics of the FX mechanics, how that works.

Omar, could you move a little closer to the phone?

You are breaking up.

Is that better?

Yes.

Much.

You did a good job laying out the revenue impact of FX on the Calvin Klein licensing business.

Wondering if can you help us understand what the margin impact is on FX.

It's obviously been a benefit the last several quarters on the top line, but I don't know if it has been -- if the weaker dollar has been hurting you on the expense side and conversely, will help you on the expense side.

Or is it an outside impact on the margins as well?

Okay, it's been -- it's a licensing business, so to say the obvious, it's 100% gross margin business.

So the top line impact goes right to the operating expense loss.

We have some level of expense outside the United States based in Milan, based in Hong Kong, based in Japan, controlling licensing around the world.

But it's relatively minimal and very -- the relative benefit or the relative offset is a 10% factor to the totals.

So 90% of what we talk on the top line falls to the bottom line, to put that into perspective.

I think just to put the currency into perspective for us, we've talked about it pretty -- for the last four years, we've talked about it pretty directly.

I think the euro is a good, particularly for us, the euro is a good benchmark of how the currencies impacts us.

From end of 2004 to the middle of 2008, basically three and a half years, the euro rose from about $1.20, $1.25 to $1.55.

In basically six weeks, it went from $1.55 to $1.25.

So that is the impact that we are dealing with.

We have talked about -- during 2004 to middle of 2008, that we have had a currency benefit on the quarterly basis of something between $1.5 million to $1.8 million each quarter.

So I think we've factored it in, on an annual basis, it has been between $5 million and $7 million, but for the next 12 months, we are basically given that all back and we are estimating that, again, not to be repetitive, at somewhere around $12 million to $16 million, starting with the fourth quarter this year through the third quarter of next year.

Good.

That's really helpful.

And then one other question, again, as you look out to next year and you think about your two main channels, putting the licensing business aside, your two main channels, the department store channel and the factory outlet.

If you think about the way consumers are going to shop, traffic trends and the risk of department store closures, are you more optimistic about your outlook channels, its ability to hold up in this environment, or do you think the department store business will hold up better?

Which one are you less pessimistic about may be the right way to ask.

In this environment, Omar, I don't think I get paid to be optimistic.

I think it is all -- I think we have to be prudent.

If, and I think it is about managing inventory and managing expenses as best as possible given the environment.

We are very fortunate we have -- that our businesses are very cash flow positive and generate a lot of cash.

So, this cycle will end too.

I know everyone -- we are in the pits of it right now, and everybody feels down about it, but this cycle will end and I think it is critical when it does end that this company will are be in much sounder competitive position because of the strength over our balance sheet as we go forward.

Now when I look at the department store channel of distribution, I do recognize that there's a number of customer that is are under pressure from a financial point of view, from a liquidity point of view, and we are very aware of that, we try to manage that business.

But we also look that there's significant winners out there that are operationally today struggling but have strong balance sheets and will continue into the future and we are building businesses with them as we go forward.

So I think the factory outlet channel will be under pressure in this environment and to value -- it is a value channel of distribution, but when the mid tier and department stores are as promotional as they are, the relative value in the channel is under pressure and that puts more pressure on gross margins there.

I think department stores are being prudent about their inventory management so I believe we can get that right sized, that both of us, even in a negative comp store environment, could have reasonably good performance there, if we can get the inventory right sized to sales expectations.

Okay.

Thank you.

Best of luck for the holidays.

Thank you.

We will go next to Carla Casella with JPMorgan.

Hi.

Two questions.

One is, you mentioned the average retailers planning spring down in the 5% to 10% range on inventory.

Where would you say on average they are today, and how much does that range?

We've heard from several retailers, I think (inaudible) mentioned that inventories are down about 9% in November.

Do you have a sense how widely that ranges among the different department stores?

I think it is a range that would probably run between down 3 to down 10 I think, and I think based on everything I have read in discussions that we've had.

I think some of it is how much of -- it's important that we manage our own inventory, not only on our balance sheet, but in the channel of distribution, and we are being aggressive about that.

How much private label is sitting there that has got a longer lead time for some of the department stores that they can't get out of, puts pressure on all of the brand of businesses as well.

I think if you went retailer by retailer, you will see a different story with each retailer, but it is a pretty wide range.

I think there was an anticipation, turn the clock back as we were coming into fall.

I think we were all try -- I think the inventories were all being planned in line with sales expectations or even below that.

Comps were being planned in the mid to low single digit range for third and fourth quarters, and I think inventories were going into that period down about 4% to 5%.

So, given that sales expectation, I think the inventories were managed well, but we did a financial tsunami in the middle of September and October, we all know what's happened and clearly, the demand has exceeded the inventory -- the demand reduction has exceeded the inventory reduction at the time, and we are all paying the price now trying to get our inventories in line for the fourth quarter.

Okay, great.

Then can you give us any sense of the amount of vendor allowances you had to pay out last year in the fourth quarter for retailers that were hitting or exceeding volume targets that may be a benefit to you this year not having those?

Well Carla, I think two things.

One, if I gave you a percentage, it would be meaningless.

Do we sell it in the high or do we sell it in the low, do we promote off of that?

So, I don't know to give you percentages makes sense.

We are not anticipating any improvement in our allowance rate in the second half of 2008 given where business is right now.

I would have anticipated it three months ago but right now, given the state of the retail environment, the state of the consumer, the promotional cadence that's out there, I don't think we are going to anticipate any improvements margins, and in fact, I think it may be under even more pressure.

Okay, great.

Thanks.

Robert Drbul with Barclays Capital has our next question.

Hi, good morning.

Two questions for you.

The first one is in the outlet business, in your retail business, are there still tunes to better manage the labor part of the equation and the second question is, Manny, can you just maybe give us an update on your philosophy around advertising for your brands in this environment today?

On the retail store, we flex hours with demand and that clearly as sales, as comp stores grow you flex hours to grow, but you get, you do get significant leverage off of the management in the store and the field staff in the store.

And as the hours come down, as the sales come down, you can flex downward, but it is not a dollar for dollar basis.

So we have -- there's a variable nature to it, but there's a also a fixed nature to it, and I think we do it as well as anyone, particularly in the outlet environment, and we have sophisticated tools that allow us to really monitor that, and we are putting all of that obviously in place.

On the advertising question, we are not putting back.

This is not about the next six months or nine months or 12 months, this is about coming out on the other side of the cycle, stronger than we are today.

That doesn't mean we are just running and spending money willy-nilly, but by the same token, there is a level of marketing that's necessary for our brand.

In prior years, given the Super Bowl and some fourth quarter items with Christmas that we've stepped on the gas in great years, we won't be doing that kind of spending, but there's a level of spending, and this year's advertising overall will be up slightly on a dollar basis over last year's advertising.

Great.

Thank you.

Susan Sansbury with Miller Tabak has our next question.

Thank you.

Hi, Manny.

Good morning.

Quickie question with respect to what's on the list for some revisions in terms of investment next year.

Can you make any comment about the Calvin Klein retail stores in terms of whether they're on plan and if you anticipate -- if that's an area where you anticipate making some cuts, ditto the Timberland roll out and any additional launches?

Okay.

On the, on the Calvin Klein specialty stores, I think I said in the second quarter, press -- conference call, we will not be opening any stores next year, and that will result in a pretty significant capital savings over this year.

So that is a portion of the $50 million take down that we see in capital spending.

As you can imagine, those stores continue to run at about 50% of our pro forma plan that we had put together.

It is unfortunate that we launched in this kind of environment, that is the reality of what we just got caught in.

So clearly traffic in the malls that we are in is way down.

It is impacting our business and impacting our co-tenants in those same malls.

So clearly, there is an area where we will not be spending more in capital.

On our sportswear dress shirt businesses that are all pretty healthy and performing, if we have opportunities to expand programs to expand as appropriate into appropriate doors for each of the brands given our strong capital bis we will continue to make those investments and open those shops be it Timberland, be it IZOD Women, be it IZOD.

So next year I think the plan is to open somewhere in the neighborhood of about 100 new shops for Timberland between Macy's, Dillards and some of our partners.

I think that's appropriate for the brand and given our strong cash position, we are not going to back off of that.

Okay.

Sounds good.

I had a memory lapse, I guess, about the CK retail stores.

So, well, best of luck, I thought this was quite good and I am sure you will manage through.

Thank you, Susan.

Sure.

David Glick with Buckingham Research has our next question.

Good morning.

Hi, David.

Manny, you have given us a good sense of the forward run rates for the Calvin Klein licensing and outlet businesses.

I was just wondering for -- in your assumptions in Q4 from a revenue and some color on the margins, the dress furnishings business and the sportswear business, excluding Timberland, can you give us a sense of what your revenue growth assumptions are for the fourth quarter so we have a sense of the run rates because obviously, they were pretty strong for the third quarter.

I just wanted to get a sense for how that is trending in Q4.

We are planning our wholesale business from the low end to the high end of the range, up around 5% to 9%.

And to put that into perspective, IZOD women's and Timberland represent about $15 million of that increase, or about 5% of it.

Let me take that back, about 50% of the 5% to 9% growth.

A number of new dress furnishings programs, Van Heusen is now at Macy's West.

So in the fourth quarter, we are shipping in Van Heusen product into Macy's West, really started to ship in November.

We thought we would ship in October, but it really shipped in November.

So, positioning that on the floor and getting that rolling going forward.

It is a number of new dress shirt programs coupled with the IZOD women's and Timberland continued roll out, really is providing all of the growth associated with that.

We have got the orders in the projections in hand.

So I am pretty comfortable with that rate of growth that we have planned, even in this tough environment.

So, we should think about your ex-outlet and new businesses kind of a flattish revenue trend for --

Yes, I think you should think about our dress shirt businesses up slightly, ex-new programs, and you should think about our sportswear businesses as down slightly ex-new businesses, and that should lay it out pretty well.

And in term of new businesses for next year, you have Timberland as a plus for the first half of '09, and then you have those 25 converted Geoffrey Beene to Calvin Klein outlets.

Should we think about as kind of the major pluses for 2009?

I think if you take out the Geoffrey Beene volume, the $100 million, yes, then those 23 stores that we are converting will be plus volume to the Calvin Klein retail business, and we should have about five to six months of shipping for Timberland in the first half of the year to annualize that business going forward.

The other new business that we have coming on, and I guess it is for Father's Day 2009, will be the Tommy Hilfiger dress shirt business.

Do you have a sense for how many doors that is?

Let me make it easier for you.

I think on an annual basis, we're planning that business between $10 million to $15 million, principally Macy's.

Okay.

I know dress shirts is kin of a recession resistant type of business.

I am still a bit surprised at how that business has held up.

Obviously, you are still confident that given replenishment nature, that that it is still not a margin risk for you guys and feel good about that business going forward?

Yes, dress shirts, you know as well as I, dress shirts are very (inaudible) business, it's a replenishment business.

So if you could stay on your sales plan, your margin risk in that business is much less than sportswear and some of the elements that we are in.

So it has been a, a real strong anchor for us in this time of chaos.

So dress shirt business has really just continued to perform, and even as the retailer comps have slowed down, our dress shirt business has continued to perform.

Thanks a lot.

Good luck.

Thank you.

We will go to Evren Kopelman --

Operator, we will make this our last question.

It is already after 10:00.

Okay.

Thank you.

Thank you.

Mr.

Kopelman -- sorry, we'll go to Evren Kopelman with JPMorgan.

Yes, thank you.

Thank you.

Just following up on the previous question on the fourth quarter guidance, for sportswear, you mentioned you're expecting excluding the new businesses, down slightly.

We're wondering -- that sounds a little aggressive given what you just said about department stores, ordering down 5% to 10% and obviously running current comp levels, but can you talk about why you feel comfortable with the down slightly expectation?

I guess slightly it is about 3%.

It also has to do with the performance that those brands have had.

We are done -- we will be done shipping for holiday in about a week and a half.

So really all that is left is shipping the -- since we are January year end, we start to ship in spring and based on where we see the order file and where we see the commitments, we feel pretty competent that we are there with that shipping spread.

So, I don't know what else to say.

I do understand what you are saying, that overall, department stores are planning minus 5% to minus 10% We are planning for the month of January more like minus 3%, but that seems to be in line with our audit file right now, and we will be able to put more light onto 2009 when we release the fourth quarter earnings.

So the relative shipping that goes on in January, just putting into perspective, as you know, $20 million to $30 million, so the exposure there is just not that significant for spring sportswear product.

Okay.

That's good news for you guys.

And on the same question, kind of on the dress shirts, you said up slightly, and it seems very strong, even in the third quarter.

Do you see dress shirts and unemployment trends go hand in hand or even as unemployment increases, you tend not to see a significant impact on that business historically?

I want to be careful because if I start talking about the last significant consumer led recession that we had that had significant unemployment, I think I have to go back to 1988 or something.

Historically, dress shirt have been a recession resistant product to a degree.

They're impacted, but not impacted to the degree that sportswear or women's product, that men's sportswear or women's product is impacted.

I don't want to get too far out there to weather the storm through everything, but it is just -- on a relative basis, through yesterday, if you look at the type of comp performances that's going on on a store level and then you look at dress shirts, it is by far one of the star performers in the channel, in the department store channel of distribution, and I think that trend will just continue going forward.

Now, the theory is with unemployment, men are doing more -- men are potentially doing more interviewing, so it goes hand in hand with dressing appropriately for business, and becoming more a sound overall environment where people are wearing more dress clothes, and I think that is the kind of situation we are in.

It is an area that works well for us.

By the same token, when the economy takes off and we -- you won't see men's dress shirts as this comping plus 9% and 10%.

In an environment that's growing, you'll see it comping in the low single digits.

So I think it is a more stable product category.

Great.

That helps.

And finally, if I can ask on the Calvin Klein licensing margin, in the third quarter, margins were down 220 basis points in that segment when sales were up 8%.

If we understand the drivers right, the excessive grow at a low to mid single digit rate, maybe, correct me if I'm wrong.

So going forward, as you expect more flatter sales, what kind of margins should we expect?

Well, so just to remind you, in the third quarter, it is about $7 million of advertising expense, it was pushed forward from the fourth quarter this year.

So we are spending -- our Calvin Klein advertising spending on a fiscal basis is up just slightly.

But our spending in the third quarter is up $7 million over last year in order to celebrate the Calvin Klein 40th anniversary.

That's directly coming out of the fourth quarter.

So in the fourth quarter, even with the flat royalty revenues in the fourth quarter, we are expecting operating margin to be up somewhere in the 150 to 200 basis point range, but it is totally being driven by a decrease in advertising spending in the fourth quarter and the relations for the third quarter.

Going forward, I think given that we are planning comps, we are going to be aggressive from an expense point of view, and I think best case scenario would be flat operating margins.

I would think it is more appropriate to plan them down probably 100 basis points.

Okay.

That helps.

Thank you very much.

Good luck.

We have no other questions at this time.

I would like to turn it back to our presenters for any additional or closing remarks.

Thank you all for your questions.

We look forward to reporting to you in our fourth quarter press release.

Have a very happy Thanksgiving, and a very happy and happy and healthy new year.

Take care.

Bye bye.

This does conclude our call.

We would like to thank everyone for their participation.

Have a great day.