PVH Corp (PVH) 2008 Q4 法說會逐字稿

Good day everyone and welcome to the Phillips-Van Heusen fourth quarter and year end 2008 earnings 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, transmitted, rebroadcast, downloaded or otherwise used without PVH's express written permission.

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 contain forward-looking statements which reflect PVH's view of future events and financial performance as of March 23, 2009.

Any such forward-looking statements are subject to risks and uncertainties indicated from time to time in the company's SEC filings.

Therefore the company's future results of operations could differ materially from historical results or current expectations as more fully discussed in SEC filings.

The company does not undertake any obligation to update publicly any forward-looking statement including, without limitation, any estimates 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 Web site 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.

It is now my pleasure to turn today's call over to Chief Executive Officer, Mr.

Emanuel Chirico.

Please go ahead, sir.

Good morning, everyone.

I'd like to welcome you to our call.

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

Given the difficult economic environment, we were pleased to deliver earnings per share of $2.95 which was at the top end of our previous guidance.

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

I am going to try to put some color and perspective onto each business segments.

I will also try to give you a sense to how we are planning the business for 2009.

Let me start with Calvin Klein licensing.

For the year, we grew licensing revenues 13% and operating income by about 20%.

Operating margins increased 200 basis points to over 53%.

Our annual results in a very challenging year are clearly a testament to the brand strength and the continued growth potential of the Calvin Klein franchise.

Focusing on the fourth quarter results, overall royalties revenues in the quarter came in right on plan and were flat against last year.

Our international business ran up in the mid single-digit range while our US business was down about 4%.

CK operating income for the quarter was up about 15%.

Looking at our largest licensing categories, Warnaco jeans and underwear, had another strong quarter.

Warnaco's royalty revenues were flat for the fourth quarter.

It's important to put that into proper perspective.

Warnaco is on a retail calendar and, as such, the prior year's fourth quarter included 14 weeks of revenues versus 13 weeks of revenues for the current year.

The extra week of revenue was worth about $20 million of sales or $2 million of licensing revenues for the prior year.

Excluding the impact of the extra week, Warnaco's sales on an apples-to-apples basis was up about 7%.

The US jeans and underwear business for the quarter were, flat while the international jeans and underwear businesses were ahead about 10%.

Internationally for the year, Warnaco added about 140,000 square feet of new Calvin Klein retail space, and Warnaco's international comp store sales increased for the quarter about 10%.

Moving to our fragrance business which is our largest product category, this was by far our most challenged Calvin Klein business in the fourth quarter.

Total fragrance royalties in the fourth quarter were down about 25%.

The two primary channels of distribution for fragrance are high-end US department stores and travel retail, principally duty free airport shops.

Both of these distribution channels were negatively affected and impacted by the global economic recession and a significant reduction in the quarter due to international travel.

In the US, our licensing partner, G-III, continued to post strong sales in both men's and women's outerwear categories, as well as strong growth in the women's dress category.

Both of these categories ran ahead of plan for the year and the quarter.

Royalties for the quarter were ahead about 10% associated with G-III.

Our men's and women's footwear licensee, (inaudible) also had an excellent quarter, recording sales growth of about 30% in the quarter.

They benefited both from a continuation of door expansion in the US as well as comp store growth in the US, as well, in the fourth quarter.

I'd like to just touch on some of the new product launches and innovations we have planned for 2009 associated with Calvin Klein.

In Calvin Klein jeans we will be launching our first dual gender jean in the fall of 2009.

It's called the Body Jean and the launch will be supported by a major marketing campaign.

We are not only launching it on a dual gender basis but we are also launching it across all geographies -- Europe, Asia and the US at the same time.

So we think it is an exciting platform for us to deliver the message and the newness and innovation that we see in the Calvin Klein jeans product.

Calvin Klein underwear has two strategies as it relates to product innovation.

One is product development, and there we will be relaunching Perfectly Fit.

It will be coming on again.

As you will recall, it was one of our most successful and exciting initial launches.

We also will be launching in the fall a new marketing campaign for underwear which will also be dual gender.

We are in the process of finalizing the concept for the campaign and signing up high profile celebrity spokespersons for the campaign.

The details will be announced in the next month or so, so you will have to wait for that announcement to come out.

In September Cody will launch a new men's CK initiative.

It will be supported by a large media spend.

The fragrance is targeted to a younger male customer so there will be a big push on the Internet, sampling and other non-traditional advertising.

Additionally in the fall, Cody will be relaunching Euphoria women's and men's which is our largest franchise for the Calvin Klein portfolio.

In the fourth quarter of '08 we launched a new line of furniture under the Calvin Klein label.

We will be in about 150 Macy's doors with this product and have seen some good initial selling.

We don't believe that this will be a very large business for us but we do believe it has very high visibility and that it rounds out our total home offering and really brings forward the Calvin Klein lifestyle.

As we expand, we are also looking to expand our retail square footage footprint internationally by about 120,000 square feet.

That expansion will take place principally in Europe, Asia and South America.

So there are significant growth plans for our Calvin Klein business.

Moving on to our legacy business, I just wanted to touch, we are looking for combined wholesale and retail business for the quarter, it came in right on plan.

Sales are down about 3% in the fourth quarter.

Our wholesale sales for the quarter were flat with strong dress shirt performance was offset by weaker sportswear and neckwear sales performance.

At retail our comp sales for the quarter were minus 9% with our heritage businesses posting a minus 5% comp against last year's minus 4% comp stores.

Our Calvin Klein retail comp for the quarter ran down 14% versus a prior year of up 8%.

Our intelligence shows us, from being out on the marketplaces, that the higher end brands in the factory outlet channel were under more pressure from a comp store performance as opposed to some of the more moderate national brands.

In addition, just to remind everyone, our Calvin Klein brand experienced 27 consecutive months through September 2008 of comp store growth, approaching about 10% during that period of time.

So this is a franchise business that's clearly been a high performer for us and is now dealing with the economic effects of the market.

Operating margins in our combined wholesale and retail businesses for the quarter were down about 400 basis points, driven by significant promotional clearance, clearance markdowns and selling, both in our wholesale and retail businesses.

We were very aggressive in the fourth quarter in order to reduce inventory levels, and at year end our inventories are very clean both at retail and on our balance sheet.

Overall our retail, our inventories are down 12% at the end of the fourth quarter.

As we look out to 2009, we are planning the business realistically off of our fourth quarter sales trend.

Our plans assume that the negative sales trends will continue for the first three quarters of 2009 with a leveling off of sales in the fourth quarter, when we anniversary our most difficult business trends for 2008.

Our Calvin Klein royalties are also being planned off of fourth quarter trends, and as such they are being planned up 4% on a local currency basis.

However, we anticipate that foreign currency translations could negatively impact us to the tune of about $10 million.

Moving to gross margins, we are planning margins to be flat to slightly down by business unit.

Our assumption is that the promotional environment will continue into 2009.

Our inventories are very clean, down about 12%, so there's clearly the opportunity to outperform our gross margin plans if we meet sales expectations during the period.

However, given the challenging environment, we believe that at this time it is more prudent to plan gross margins cautiously and allow any future margin benefits to be recognized as they occur as we will be managing our inventories very tightly.

From a liquidity point of view we have a very strong balance sheet, ending the year with $328 million of cash and no outstanding bank debt.

We have a $325 million line of credit that does not mature until 2012 and no maturing long-term debt until 2011.

We have aggressively cut capital spending in 2009 by 55% to about $40 million, and overall we are projecting free cash flow for 2009 to be about $70 million.

One of our greatest assets is our balance sheet and our liquidity.

We intend to use that as we go forward to take advantage of opportunities that may present themselves in the near future.

We believe it gives us the stability to continue to maintain and grow our market share with our brands and position us as we go forward.

With that I'd like to turn it over to Mike Shaffer, our CFO, to quantify some of what I said.

Thanks, Manny.

Other than 2008 revenues, the balance of my commentary reflects non-GAAP results which is reconciled in our press release.

Our total revenues for the fourth quarter were down 1% from last year to $578 million.

Calvin Klein royalties revenues were flat to the prior year, while our wholesale and retail businesses were minus 3% to the prior year as the difficult economic environment continued to impact our businesses.

Our outlet stores delivered minus 9% comps for the fourth quarter.

Earnings per share for the fourth quarter was $0.30 which was at the top ends of our guidance and exceeded consensus estimates.

Driving these results was our Calvin Klein licensing business which delivered 16% earnings growth on flat revenues as we managed marketing expenses related to Calvin Klein anniversary events from the fourth to the third quarter.

We ended the year with inventories very clean, on plan and down 12% for the prior year.

We continued to have strong positive cash flows and generated about $58 million of cash in 2008 after a voluntary pension contribution of $25 million.

As we look forward, we are continuing to feel the pressure from the difficult economic environment and have projected the current difficult trends to continue for the first three quarters of 2009.

We are projecting the fourth quarter to show some improvement in trends.

Looking at our business units, Calvin Klein royalty revenues for the year are projected to be flat and reflects royalty growth on a local currency basis of 4% offset by $9 million to $12 million of foreign currency translation impact.

Calvin Klein advertising revenues are planned to be down approximately $10 million in 2009 as a result of less discretionary marketing spending this year versus last by our licensees.

As a reminder, advertising revenues for Calvin Klein are shown as revenue and a like amount expense in SG&A.

As such there is no net EBIT impact.

Operating income for Calvin Klein licensing segment is projected to be flat to the prior year in dollars.

Our wholesale and retail businesses are being planned down approximately 4% as we continue to feel the pressure of the current economic slowdown on these businesses.

Our wholesale revenues are planned to be down 6% to 7% for the year and our retail business is planned to have comp decreases of 6% to 7%.

Partially offsetting these revenue declines are new store revenues which are primarily from conversions of Geoffrey Beene outlet stores to Calvin Klein outlet stores.

Wholesale and retail gross margins are planned to be flat to down approximately 100 basis points as a result of the highly promotional environment.

And our expenses are planned to be flat for the year in dollars as $30 million of expense savings initiatives are being offset by about $15 million of expenses related to new store openings and normal expense growth of about $15 million.

Regarding earnings per share for the year of $2.00 to $2.30 reflecting the items I previously discussed.

Full year 2009 cash flow is projected to be $65 million to $75 million and reflects capital spending of $40 million.

We will be prudent in our spending as we continue to invest in our businesses.

Now let's look at our guidance for the first quarter.

Our earnings for the first quarter are estimated to be $0.40 to $0.50.

Overall, we are assuming that fourth quarter sales and margin trends continue into the first quarter.

Our combined wholesale and retail businesses are planned at minus 10% and reflect our wholesale businesses down about 10% and retail comps down about 10% for the prior year.

Our gross margin for the first quarter is planned down between 50 and 60 basis points reflecting the current promotional environment.

Our expenses for the quarter are estimated to be relatively flat in dollars but up significantly as a percent of sales as we deleverage expenses due to sales declines.

In addition, expense reductions associated with the restructuring programs will be more impactful in the second half of the year.

We are planning our Calvin Klein licensing segment royalty revenues for the first quarter at minus 2% to minus 4%.

On a local currency basis, Calvin Klein royalties will be up 4% to the prior year, offset by $3 million to $4 million of foreign currency impact.

Our operating margins in the Calvin Klein licensing business will be relatively flat to the prior year.

With that we will open it up to questions.

Thank you.

(Operator Instructions) We'll take our first question from Ben Rowbotham with Goldman Sachs.

Hi, thanks, and good morning.

My question stems from the SG&A line, and I was wondering what kind of flexibility you have on that SG&A build in, maybe if sales come in a little bit weaker than expected?

Ben, I guess we continue to look pretty hard there and we have a number of initiatives in place in order to do better than we are projecting right now.

And I think as the year unwinds you'll probably hear about some more cost cutting initiatives that we have in place in order to improve flat dollars year over year.

Right now the way we are projecting it, we are projecting it flat.

We have some flexibility and we will use that going forward, but it also will take some restructuring in order to get some of the expense initiatives that I'm touching on.

So those would be coming through in the next six to nine months.

Got it.

And then on the sourcing side, I was curious about your comments around the ability to maybe outsource that part of the company given some of the competitive movements in the space.

Economically, what is PVH's competitive advantage there?

We've got a long history of running our own production.

When we look at what the cost would be to use a third party, and when we look at what our direct costs on the grounds are in the Far East, the Middle East, in the office we have, every time we do that analysis, our internal costs always seem to be anywhere from 150 to 250 basis points lower than what it might charge to use a third party.

And, yes, also from a cultural point of view, just to talk about the company, this has been what I would consider always been a strength of the company.

Our heritage has always been in the moderate brand area prior to our acquisition of Calvin Klein.

So we understand how to source product in low cost countries, how to do it efficiently, how to align the piece goods and the rest of the raw materials with the production, do it efficiently.

We don't seem to get in trouble as we do that.

As we look at our overall operating margin compared to most of the industry, our margins are as strong as everyone else.

So we continue to look to streamline that pipeline, but as far as outsourcing it, it's just not something we consider.

Finally, as you look at the same store sales guidance you guys are expecting something of a pick up as the year progresses there.

Is that more a function of just easing traffic comparisons or what's really driving that assumption?

Well, I think you said it well, the comparisons each quarter get easier through 2008.

I believe, to some extent, when we really get into the second half of the year, mid-September on, comps really just fell off the cliff for that fourth quarter period.

What we are anticipating is, if you look at it on a stacked comp basis over a two-year period, we are not looking for any improvement in the fourth quarter on a two-year basis, we are just looking for decelerating of the negative comp store trends that we are experiencing right now.

So I think it's a prudent way to plan it right now.

We have about another 60 days before we commit to inventory for the fourth quarter.

So we will be cautious and prudent as we go forward but I think it's a reasonable expectation.

Perfect.

Thanks so much and best of luck.

Next we'll go to Emily Shanks with Barclays Capital.

Hi, good morning.

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

For the fourth quarter?

Yes, please, or the full year, whatever is easiest.

For the fourth quarter, about $15 million.

Okay.

Great.

And then can you speak at all around if you were seeing some type of moderation in the comp declines in the months of February and March.

I recognize your guidance and I greatly appreciate all the detail you've given around the guidance but there's been this concept that's been out there, and I'm sure you have seen it as well, that the trends have been better than they were over the holiday selling season.

And I wanted to get your sense of that.

Yes, the trends in business have been -- first, let's put it in perspective.

The month of February, the first two or three weeks of February was stronger, softened toward the end of February, and the business has then gotten better in the early part, in the middle of March.

We have seen some better business.

There's a lot of noise in the comparisons, however.

First and foremost is the Easter shift.

Until that's behind us, it's always hard to read retail comps, but we feel good about the trends that we are seeing.

And I think it would be disingenuous not to talk about that we are seeing favorable weather comparisons compared to last year at this time.

Both February and March were unseasonably cool and wet last year, and I think we'd have to all agree that March in particular has been unseasonably warm.

I'm not looking at -- I'll take it, I'll take the positive business, but we are just trying to really understand it on a short term basis.

But we have seen both in our own stores and in our wholesale customers, the performance of our brands, an improvement in the trend of business particularly compared to the fourth quarter.

Okay.

That's very helpful.

I appreciate that.

And if I could just squeeze in one last one.

Can you just update us on who your significant wholesale customers are for fiscal year '08?

I know you typically list them in the K but I was just curious if they were still 30% of your sales and if Macy's is still kind of in the 10% range?

I would say yes, what you just said is fine, our three largest customers are Macy's, Kohl's and JC Penney's, and the combination of department stores and national chain represent about 28%, 30% of our business.

Okay.

Great.

Thank you so much.

You're welcome.

Next, we'll go to Robbie Ohmes with Bank of America, Merrill Lynch.

Thank you.

Just a quick question or two.

Manny, I might have missed it but how many Calvin Klein store conversions are you expecting to do from Geoffrey Beene this year?

And then also how favorable a profit swing?

I know the CK outlets are comping minus 14, but it sounds like they're way more productive than all your Heritage businesses.

If you could speak to the potential profit contribution from those conversions year over year.

And then the second question I have is, I might have missed this as well, but the performance of the Calvin Klein sportswear business that you guys operate versus the rest of heritage, and how that's stacking up.

If you break out wholesale Calvin Klein versus wholesale legacy, any thought on the '09 differences there?

Thanks.

Sure, I will take them in pieces.

We converted about 20 of the Geoffrey Beene stores to Calvin Klein in '09, and that will be complete by the end of the first quarter, that conversion.

The Calvin Klein stores operated in-store profitability in excess of 20%.

The Geoffrey Beene stores are operating closer to 10%.

So clearly there's a profit opportunity there.

We plan them with what I would say is conservatively for the estimates that are in here given the environment.

And I think they have the potential to do better, if not in 2009 then clearly in 2010 and beyond.

That's a real opportunity for us as we go forward.

On the wholesale side of the business our Calvin Klein dress shirts, neckwear businesses continues to perform in line with the rest of our dress shirt business.

Our dress shirt and neckwear businesses have been very strong and Calvin Klein has been an anchor on that side of the floor.

On the men's sportswear side of the business, in the fourth quarter in particular we've seen more pressure on that business, and I think it's a combination of the higher end brands I think in the department store channel have felt more pressure.

It was more promotional in order to move goods than we've seen in the last three years with Calvin Klein so it did to some degree affect our profitability.

So I would say overall in the wholesale sportswear side of the business, our Calvin Klein men's business slightly underperformed what was being delivered in our heritage legacy sportswear businesses on a percentage decline basis against plan at retail.

We cleaned out the inventories, we got them well-positioned as we are turning into fiscal '09, and feel positive about that, we think we will be starting fresh.

We've also positioned the line going forward to be more value oriented, at least at the opening price points, and to be more geared promotionally going into the season.

That's just the environment that we are dealing with and we've tried to work that into the product mix and the merchandising mix as we go forward.

So we've seen some lift in the business as we've come into March.

So that's a sense of it.

Great, thanks a lot, Manny.

Next we'll go to Chi Lee with Morgan Stanley.

Good morning, guys.

Does the top end of your gross margin guidance, flat, does that assume that you actually start to benefit from any pull back in the cost environment?

No, right now we are in the process of buying, we are in the process of buying the second half of the year.

It's not finalized yet but we are clearly starting to see price declines.

We haven't put any of that into our gross margin estimates now, and for now what we are basically saying is given the promotional environment we may need those markdowns just to move the goods.

That could be, I don't want to use the word conservative but it clearly creates an opportunity, particularly in the second half of the year, for some margin expansion against what we are planning against.

We felt at this moment in time to give ourselves a little bit more visibility we might be in a better position to talk to that with our first quarter earnings release, but clearly it's an opportunity for us because we were planning prices flat and clearly we are seeing prices down around the 4% to 6% range for the fourth quarter, third and fourth quarter.

Mike, just in terms of the $15 million increase in SG&A that's expected for the year, can you tell us how much of that is going to really hit in the first quarter?

It's probably about $2 million to $3 million of the $15 million.

And then just lastly, a follow-up question on the productivity question in terms of the outlets, I believe numbers that I recalled were that Calvin Klein outlets were generating about north of $500 a square foot, legacy at $250.

Can you tell me what that productivity gap has narrowed to in the fourth quarter with CK comps down 14?

And where do you expect that gap to go in your comp guidance for the year?

If you look at the comp store performance for Calvin Klein for the year was basically flat and heritage and the legacy businesses for the year were down about 6%.

Just to remind you, we had an extremely strong performance through September.

We were up about 11% on a comp store basis.

So if anything, on a comparative basis and I think the numbers you are quoting are at least a year old, if anything that gap has probably grown slightly.

It hasn't gone down.

The fourth quarter was just, only three months worth of business.

Okay.

Thank you.

You're welcome.

Next we have Bob Drbul with Barclays Capital

Good morning.

Manny, a question for you.

When you look at the My Macy's initiative out there, and let's say you looked out 12 months from now or 18 months from now, do you think Macy's will be a bigger customer for you?

Or maybe can you just talk a little bit on how you expect that initiative to impact your business?

Allen Sirkin has been working directly on that initiative so I am going to let him speak to it.

We are very excited about the My Macy's initiative.

We have gone from servicing four divisions to what will now be one centralized buying and merchandising group with a support from the field.

We think that consolidation in the buying side will favor our initiatives.

It will allow us to lateralize our strategies evenly across the whole country.

And from a specialization or a honing basis the My Macy's will allow to us tweak the assortments and the distributions by region.

So we see nothing but good opportunity in the initiative, and need for them to get all the players in place and processes functioning.

So we are fans.

Bob, I would just add one thing.

It's not directly related to the My Macy's initiative but I think clearly Macy's, but also our other large department store customers, are clearly focusing on their vendor base.

And a number of the tertiary vendor base I think there's a real question about, given this environment, given the liquidity crisis out there, there is a real question about their overall survivability.

And I think there is a focus on growing businesses with strong players with strong balance sheets who can do the things that are necessary in this type of environment to move merchandise, cancel merchandise, be flexible and have the financial wherewithal and merchandising wherewithal to really support our customers as we go forward and be a good partner.

So we are seeing also opportunities from that perspective not just with Macy's but with the base at all.

Because when we look at the competitive set that's out there, private companies, public companies, over the next 12 to 18 months we wouldn't expect that all of our competitive base is going to be there, at least in the form that they are today.

There's just too much pressure going on from a credit and liquidity point of view.

So I think clearly the strong will get stronger and we put ourselves in that category.

A follow up to that, Manny, when you look at the cash balance you look at where your debt is trading, where your stock is trading and the opportunities for M&A.

Can you just provide us an update of how you are thinking about the uses of cash and the timing of anything and where your thinking is around that?

I think I've been pretty consistent the last nine months talking about this.

Given the environment and given what's going on from a credit point of view, this is not the time to be aggressive about buying back stock.

I just don't believe it.

I think we are better served to, when the credit markets open and if the bond market is really working the way it should then it opens up all the possibilities.

I think first and foremost for us, we continue to look at acquisitions that are synergistic, that fit into our strategy as we go forward.

I think we've demonstrated an ability in the past to do acquisitions, put them on our platform, not to get hung up with some of the issues of integration and be able to get all the accretion that we've talked about out of those transactions.

So that is where I think the use of the cash will be over the next 12 to 18 months as we go forward.

The pipeline right now from an M&A point of view is not that active and what we are seeing really is just troubled companies and some troubled brands.

So we continue to be very active.

We continue to look but we just haven't been able to find anything that's met our requirements both from a brand strength point of view and from a financial metrics point of view.

Thank you very much.

Next we'll go to Sean Naughton with Piper Jaffray.

Good morning.

Speaking of acquisitions, the Superba acquisition I believe was $150 million in revenue in 2007 with an expectation to increase that about 5% last year.

Clearly a lot has changed but I was hopeful to get some color on how that business performed last year and the amount of cash expected, if any, for an earnout payment in 2009.

Okay.

I will start with the end first.

We are not anticipating any earn out either for fiscal '08 or fiscal '09, and that's the end of our earn out period, at this moment in time.

Nothing would make us happier than to pay an earn out because of the hurdle rates we put in from an earnings point of view.

When we acquired the Superba it was doing about $140 million in sales and next year, given some of the acquisitions, we are about $15 million to $20 million above that.

I I think we feel good about what's happened with that business.

I think we've had, until last year, particularly the second half of the year, we were on a trend to do better than that.

When we look at market share data we've grown market share in the overall US to over 50% and we believe when we acquired the company it was closer to 40%.

So clearly some of the growth that we thought we had experienced has been impacted by the environment but the business continues to perform for us.

It's a great strategic fit with our dress shirt business.

We clearly are the largest dress shirt company in the world.

We think it gives us great strength with our customer base.

We think we bought the transaction at the right multiple given where we are.

Thanks.

And then on the non-GAAP operating margin for wholesale and retail was about 2.9%, so I'm just wondering if you can comment on the profitability of that segment.

Which particular ones?

Were they all profitable or which particular ones were a drag potentially in the fourth quarter?

I think it was pretty consistent across the board.

Our poorest performing division is retail.

It still made money in the quarter but it's the one that's feeling the most pressure.

Our wholesale businesses -- all three of the businesses, wholesale and retail, those two business models, were under tremendous margin pressures.

Our operating margins were down about 450 basis points.

90% of that was driven by gross margin pressure that we really felt on our deal to get inventory levels down to the levels that they are today.

We think that really positions us as we go into 2009.

So we took action between the markdowns in our own store and the margin support for our retail partners.

It was about where we planned it at, when we gave guidance for the fourth quarter, but clearly it was below our historical benchmarks.

Fair enough.

Thanks, Manny.

Lastly, any regional differences in the CK outlet business for that down 14%?

Was there anything in a specific part of the country that was more impactful, or was there anything with respect to border trends that impacted the comp?

Yes, I think, the CK business in particular is really impacted by what we call our international tourist stores, either stores that are on the border of Mexico or Canada or stores like Harriman's, Las Vegas, Orlando where we get a tremendous amount of international tourism that drives that business.

Those centers really felt the pressure and continue to feel the pressure of a lack of international tourism to the United States.

The strengthening of the dollar has clearly reduced the buying power of the euro and some of the other foreign currencies, and that's put some pressure on our sales, as well.

So Calvin Klein, a great international brand, some of the best outlet centers that we have that are driven by tourism, those are the ones that really felt it.

From a geographic point of view, it's what you've heard everywhere else, California, Southern California continues to be very tough.

The Vegas market continues to be tough and Florida continues to be tough.

That's not just Calvin, that's everywhere.

Great.

Best of luck.

Thanks.

Next we have Jennifer Black with Jennifer Black and Associates.

Good morning and thanks for taking my question.

I wondered if first you could talk about fashion trends in men's.

It points to skinnier ties, more color.

I just wondered how you guys think about it across your brands.

All right.

I am going to let the fashion expert.

Neckwear business, the nice thing about the neckwear business is we have diversified brands which really address all the different fashion points of view.

There was a lot of talk a year ago about skinny ties getting fairly narrow.

That has not manifested itself to the degree that we had anticipated but there is a thinner point of view for the more contemporary labels, the Calvins, the Kenneth Coles that we are seeing a benefit in.

It matches up with the trends in fitted shirts and slimmer fit initiatives that are going on.

And there is still the more traditional point of view that comes with all the traditional labels that we do have.

So it's a mixed bag.

That's a good thing.

We have a mixed bag of brands.

That's a good thing.

And we can address all the different needs.

So it hasn't taken over the market.

It's just taken it's rightful share of the floor space.

I was just curious if there was a reason for men to shop.

And then I just wondered, too, how are you planning Father's Day?

We are planning Father's Day at the same trends that we saw fourth quarter.

It's part of that basically end of May, June period, comps are planned down probably about 7% to 8% and our wholesale business is planned down a like off of that.

I guess we haven't seen any reason to change that.

It would be premature to get more aggressive with that right now.

Okay.

And then are there any changes in conversion in your own stores since the last quarter?

And then any comments you have on e-commerce?

Okay.

On conversions, the conversions are up in our own stores.

I think there's two things going on.

People are shopping, they are seriously shopping.

They are looking for value, and if you walk into our stores you clearly are going to see a value message in those stores and we are not waiting to try to sell regular priced goods.

Goods are hitting the floor and we are being promotional in getting them to price points that will transact not just for clearance but also for new spring and that's factored into our margins.

So I think we are delivering to the customer what they are looking for so our conversion rates are up.

Traffic is slightly better than it was in the fourth quarter but it's still trending negative and AURs compared to this time last year are down slightly.

What was the second question?

The e-commerce, is there anything that you are doing with e-commerce that's notable?

Sure, on the Calvin Klein side of the business we launched in the second half of last year CalvinKlein.com.

That business is off to a good start.

It's in its infancy.

We are experimenting with it.

We are getting a lot of traffic to the site.

We are servicing the business appropriately.

We think over time -- and when I say over time I think over four to five years -- it could be a $40 million to $50 million business for us as it goes forward, but right now it's 10% of that.

So we clearly think it's an opportunity particularly as we build traffic to the site.

We do sell all of our other brands through the Internet.

We haven't seen any dramatic changes there.

It's more or less following the trends of regular retail.

It may not be down but it's not growing the way it was.

We don't control a great many of that directly ourselves.

We use a lot of our portals of our customers and I know their e-commerce business has been relatively stronger than their brick and mortar.

Great.

Thank you very much.

Good luck.

Next we have Omar Saad with Credit Suisse.

Thanks, good morning.

Two quick questions hopefully.

Manny, I wanted you to talk about your approach to marketing, how it's changing in this environment especially in light of the comments Mike made around the guidance that the advertising revenues are planning to be down for Calvin Klein.

And if that's coming from the licensees or internally or both?

How are you looking at marketing the Calvin Klein brand as well as the other brands in the portfolio given what we are seeing out there?

Sure, I guess to put it into perspective, 2008 was the 40th anniversary of Calvin Klein.

A number of our licensees in conjunction with ourselves did a significant amount of what I will call discretionary spending on that event and promoting that event.

So what we are really seeing is somewhat a decline in the spending related to the Calvin Klein 40th anniversary event.

Also just some of our licensees, given the more challenged business environment, are hitting all their contractual requirements but not necessarily over spending market.

We are still spending over $150 million on the Calvin Klein brand from an overall marking advertising of that brand, when you look at all the categories we are in, and we are at probably 2007 levels of marketing spend for Calvin Klein.

So we are really not taking much of a step back.

In addition, our dollars are buying us more, we believe are buying us more this year than they did last year given just the general environment that's going on both in print, television and at cinema.

So we don't think the consumer will notice at all.

So all of that said, I think you are going to continue to see a tremendous amount of marketing associated with the Calvin Klein brand.

When it comes to our legacy brands we really haven't stepped back at all from a national media point of view.

The dollars are being planned flat year over year, and as a percentage of sales it's up slightly and it's an area where we have some flexibility where we could pull back to the tune of $4 million to $5 million if we chose but at this moment in time it's one of the areas that we are planning to spend and we will see how the year transpires as we go forward.

We've got a number of initiatives associated with the legacy brand activating around sports sponsorships including Izod with the Indy 500, the Indy Racing League.

Izod with the Izod Center in New Jersey, with a number of concerts and the sporting events going on.

And we've got a targeted plan with asking JC Penney for Van Heusen in conjunction with the National Football League that's planned for fall.

So a lot of exciting things being planned and are in the pipeline and are being budgeted for.

So I think, all-in, our marketing dollars will be down slightly but not noticeable to the consumer .

What's the thought process on the legacy brands?

Is it to support the retailers with the marketing despite the negative sales projection?

Is it to really generate traction with, you said weakness in the environment with some of your other competitors?

The sense I have and from what I've seen based on talking to the publishers and some of the buying groups that we deal with is that there is a pull back and there's a pretty substantial pull back in marketing on what they are calling fashion.

And I think that basically means apparel, footwear marketing, in print and in television and cinema, and we just don't believe we should pull back.

Given the environment that we are in I think this is an opportunity to gain market share.

It's not an opportunity to give it up.

I think there's weaker players out there and when somebody is down you step on their throat and that's what we are trying to do and we are not going to back off of that, so I think we continue, we are going to play to our strength which is our financial strength and our brand strength.

And to save $5 million or $7 million is a nice thing to do but I think what it might benefit us as we look into 2009 and beyond is more important.

A question on the fragrances.

When did that business start to turn?

Did that just start to turn recently?

It turned about the same time that the banking crisis turned and everything went down.

I mean, if you think about it, the United States in particular, the primary channel of distribution is high end department stores from Sachs, Nieman's, Macy's, Dillards, Bloomingdale's, and that business, when we had the financial crisis, really just the business in general in department stores, went off the cliff.

That's a huge fixture filled business.

They load up the goods going in.

If the goods don't meet their sales expectation it's easier to turn the spigot off from a sales point of view of receipts and that's managing your inventories.

That's what department stores did.

So clearly when we saw it all hit was beginning in October.

Even with some of the really what we thought was outstanding launches we had in the pipeline, it just couldn't overcome the environment, the lack of traffic out there.

And I can't think of anything more discretionary than fragrance from a purchasing point of view, and I think clearly it was impacted by that.

And more so than apparel, it got more impacted that the apparel side of Calvin Klein.

Absolutely.

Last question, the dual gender jean, I know Calvin Klein had a lot of success with the dual gender fragrances.

Can you explain to me how the dual gender jean works?

It's more of a marketing handle, same name for the jean and the marketing campaign will be done on a dual gender basis.

It's going to be presented that way.

It's not that men and women wear the same jean.

They will be sold in separate departments, but the marketing campaign associated with it will be a singular marketing campaign that will focus both on men and women.

Previous campaigns have tended to be more of a men's focus or a women's focus.

This is really a new product launch.

It will be for both sides of the floor.

Thank you.

We have David Glick with Buckingham Research.

Yes, good morning.

Mike, just a quick question, understanding Q1 a little bit better.

Your fiscal year guidance was certainly in line with expectations, Q1 was a bit below.

Can you walk us through the drivers of that that makes Q1 be down disproportionately relative to the rest of the year?

I'm sure part of it is FX, the timing and impact of your new Calvin Klein stores which probably don't come online until after Q1, some of the cost savings, maybe help us quantify what those variables are and help us understand how the earnings trend improves for the balance of the year.

Sure, David, for the first quarter, what we are looking at is about a 400-point decline in operating margins.

And basically it's really a continuation of the fourth quarter trends in sales and the fourth quarter trends in margins.

And I guess the only other thing I would add is that FX, clearly the nine to 12 that Michael talked about as an impact for the year is skewed heavily into the first two quarters of the year when, just as a representation, the euro was 1.55 versus where it is today or where it might be by the end.

So I think that 85% of the $9 million to $12 million in the first half of the year, I think we call that about a $4 million hit associated with that in the first quarter.

And the new CK stores, when do those come online and what kind of revenue can that add for the balance of the year?

We will open those stores primarily -- they will all be open by the end of the first quarter.

We will see the revenue start to come in on those stores quarter two, and it's probably worth about $40 million, $35 million to $40 million.

So that would be, that and FX, are probably the biggest drivers to the earnings trend improvement?

Yes, and then just the overall margins just being planned prudently at this point to say it's going to continue and it's going to stay as promotional as it was in the fourth quarter.

Some opportunity might be on that line.

And lastly, in terms of the Calvin Klein local currency growth of around 4%, can you just give us some color on the big chunks of those businesses, as you commented on the fourth quarter performance, how you are looking at the relative performance of those businesses in '09 and how they add up to around a 4% increase in local currency.

I think maybe the best way to do that is to focus in on it on a geographic area rather than by product category area.

I think geographically overall the US is being planned down about 4% to 5%.

Asia and Europe on a local currency basis is being planned up 5% to 6%.

And we have about $3 million to $4 million of royalties that are being paid on a minimum basis that aren't driven by sales, $3 million to $4 million of growth there.

When you put that all together, net against that, the $9 million to $12 million of FX going against it, it gets you to about flat overall royalty.

But again, geographically we continue to see strength coming out of Europe and Asia on a local currency basis.

A big piece of that is being driven by the strength of the brand in those markets, particularly Asia and some areas where there's just white space throughout Europe where we don't have a strong presence in a lot of countries, particularly in northern Europe.

In addition, this year benefited from opening of about 140,000 square feet that was spread pretty ratably throughout the year so we will get the benefit of the full year effect of that, plus putting on about 110,000 to 120,000 square feet of new retail space internationally in Europe, Asia and South America.

So a big piece of it will be direct retail.

And I think Warnaco on their last equity conference spoke to the fact that their comps on a local currency basis and internationally was still running in the plus mid single-digit range.

So as much as the world is a tough place, the Calvin Klein brand continues to perform.

Thanks for that color and good luck.

We do have our next question from Jeff Mintz with Wedbush.

Thanks very much.

Mike, going back to the S&GA issues, can you just break down the $30 million in savings that you are planning into some buckets?

I guess $10 million is coming from the Calvin Klein, the non pass through of marketing, but can you talk about what the other $20 million is?

The big buckets of the savings are really people.

We announced a restructuring, there were about 400 jobs that have been eliminated.

We do have some depreciation savings and then an overall enhancement, an overall review of all operating expenses.

Jeff, we attacked travel.

We attacked all those discretionary spending amounts.

We looked at our marketing expenses.

And I guess I would just make one comment.

In our effort to be as transparent as possible, when we look at the businesses we've taken the 2008 results and we've pulled 100% out the Geoffrey Beene operations to try and make it apples-to-apples.

Within the Geoffrey Beene operation is about $45 million of expense, $35 million which relates to the stores and $10 million which is essential office expenses.

If we had left it apples-to-apples instead of projecting flat expenses, we would be planning expenses down $40 million to $50 million.

So I think in some ways we've kind of put it in the worst possible light in an effort to try to be as transparent as possible to try and show the results of the businesses and comparability with those businesses.

So clearly, although we eliminated 80% of the Geoffrey Beene stores, we've shown the expenses for being eliminated for 100% and we are putting on 20 new Calvin stores for three quarters and that's worth about $50 million.

So I think some of it is just the comparison to what we are using as a base line.

And as I said I think there's opportunities to do better than what we are projecting.

So I hope that puts color on.

It does, Manny.

Thanks very much.

Just going back to a comment you made earlier about the potential for some tertiary brands to go away in this environment; do you see that as just an opportunity for you to gain floor space, or do you think there ultimately is some margin opportunity for the survivors in the department stores?

Well, clearly I think there's market share space and clearly there is gross margin enhancement going forward, not because we have more leverage with Macy's because we have more space but because I think working together we can get our profitability back to historical benchmark levels of just 12 months ago.

There's substantial opportunity to just get that back by better managing inventories, working together better, and to be perfectly, to cut right through it, to just get sales expectations back in line with what actual inventory levels are.

So last year, as much as I think the whole industry both at retail and I know ourselves was trying to get their inventories under the sales expectations, every time we thought we did we had sales planned for the second half at minus 3%, our inventories were down 5% going into September, we thought we were in excellent shape, well actual sales results were minus 10% because of the financial meltdown that took place.

So the last 12 months has been a constant chase to get inventories right-sized, and I feel we're there now and based on the trends I feel we are there but I'd like to see it for a little bit longer period of time before I get comfortable.

Great, thanks very much and good luck.

Next we have Carla Casella with JPMorgan.

Hi, two questions, one on the lead times that you are seeing.

If in fact either the economy rebounds or if we see another leg down, how quickly can you change your lead times in maybe replenishment orders?

Replenishment is very easy, meaning dress shirts and some of our core basic product.

We have the piece goods in place and within 30 to 45 days we could answer the demands.

Neckwear has an eight-week cycle so clearly we can get back into it there.

Nothing would make me happier than running out of inventory.

Then you really see the margin explode.

So I think that's what we are trying to get to at that point is to keep the market hungry for goods as opposed to overstock them.

We will chase it as we go forward.

We have a lot of flexibility in the area.

Obviously with fashion goods you don't get back into those goods for three months but on basics and core replenishment, we can get back in in 35 to 45 days.

We'll react to trends.

On some of your new lines, you mention that you are benefiting from some of the retailers consolidating vendors.

As you are looking at placing new lines, are you avoiding any of the retailers where you think their business is not quite as strong as some of the major national players?

Well, that's not even, that's just in business as usual for us.

We monitor the accounts receivable.

We try to really stay on top of that situation.

I'm not going to get into names but there are a number of players out there that there are always rumors floating about it.

It's something we deal with every day but in this environment it's just more intense.

Last year there was a number of bankruptcies and we really managed ourselves well through that.

We took some receivable hit but we really managed it down at that point, and I think we earned more on the gross margins we sold in than offset by the hit that -- it was a net positive for us last year.

So we are monitoring -- long answer to a simple question -- we are monitoring it very closely.

If we are uncomfortable with a retailer we are not building businesses, we are trying to keep those at a normalized level.

Do you see that we will see another slew of bankruptcies this year?

I think -- yes, I think, short answer, yes, I think it's just inevitable given the environment.

Unless there's a complete turn around, I think there's going to be more pressure on customers.

I think some of my competitors aren't going to be here in the form that they are in the next 12 to 18 months and I think it's a fair statement to say we will have less stores in 12 to 18 months than we have today.

And that's just the reality of where we are.

Now some of these will use Chapter 11 to come out of it, some of them will be sold.

So I don't think all the real estate and stores just go away but it may not be in a form that they are today.

All right.

And then do you use factoring on insurance for any of your retail customers?

No, we never have.

We've always done it ourselves and right now insurance on anybody that you would want to buy is just so expensive and so limiting that we wouldn't entertain it.

Last question, your thoughts on or ability to buy back bonds, would you consider it, do you ever look at that just that they are trading below par?

Sure.

We constantly look at it.

When they were trading under $0.80 on the dollar it was interesting.

I think right now, last we looked at it it was over $0.90, $0.95 on the dollar and it's just not as interesting at this point.

The bonds are fairly illiquid in the market.

By that I mean if somebody did go in and try to buy $5 million or $10 million, I'm not sure the price would necessarily stick where it is right now.

And given our credit statistics and how we significantly improve, I don't think that we can go into the market and really buy them at a substantial discount to the face.

So at this point we constantly look at it but it doesn't seem to make sense right now.

Okay.

Great.

Thanks.

We will take one more question.

It's already after 10:00.

Okay.

We'll next go to Kate McShane with Citi Investment Research.

Hi, good morning, thank you.

Most of my questions have been answered but there's been some questions and commentary around the better trends in early February and early March now.

So I wonder if you could just talk about the promotional environment too at your wholesale accounts currently and how it compares to Q4.

Has there been any relief there, especially with inventories down at both the wholesaler and the vendors?

I think the retailers are being much smarter about their inventory promotions now.

By that I mean, not that they weren't smart in the fourth quarter but I think the real issue in the fourth quarter was inventory was piling up and they had to move goods.

In the fourth quarter there was a dramatic and significant amount of clearance markdowns, 60%, 70% off.

We obviously haven't at this point seen that kind of promotional environment at department stores but they are being very sharp on their value message.

Our new spring goods are hitting their first markdowns sooner than before.

The good news is stocks are in line with sales plans seen in department stores across the board so there is a need to juice the business and promote is to drive traffic, it's not to liquidate inventory.

So that takes a lot of pressure off of the, of AURs.

Clearance is obviously the most expensive markdown.

So coming into February, holiday and fall inventories were in line so we are seeing some improvement in overall AURs just because there's less clearance out there than would have been anticipated.

We were able to move through it quickly in the fourth quarter.

So right now I would say it's still very promotional from a spring point of view but substantially less clearance markdown, and if we continue on this sales trend that should continue into May, June and July, and that's the usual time frame that you see big sales going on on spring goods.

Okay, thanks very much.

Okay.

With that I would like to close the call.

I thank everybody for joining us this morning and we look forward to our call in May.

As always, if you have any questions please feel free to call us, particularly call Mike or Pam.

With that, everyone have a good day.

Thank you.

That concludes today's conference.

Thank you for participating and have a great day.