PVH Corp (PVH) 2009 Q2 法說會逐字稿

Good day, ladies and gentlemen.

Welcome to the Phillips-Van Heusen second quarter 2009 earnings conference call.

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The information made available on this webcast and conference call contains certain forward-looking statements which reflect PVH's view of future events and financial performance as of August 19, 2009.

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

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

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

A reconciliation of these measures is included in the Company's earnings release which can be found on the Company's website, www.pvh.com, and in the Company's current report of, on Form 8-K furnished to the SEC in advance of this webcast and call.

I would now like to turn things over to Mr.

Emanuel Chirico, Chief Executive Officer for Phillips-Van Heusen.

Please go ahead, sir.

(Technical difficulties.

Audio in progress.) Mike is going to quantify the financial results for the second quarter after my comments.

And then I am going to come back and try to put some color and perspective on to the our projections for the balance of the year.

Well let me start with the business roundup.

I will start with Calvin Klein licensing.

Overall, our royalty revenues in the quarter were down about 6%, and on a constant currency basis, declined only 3%.

Operating margins improved significantly by 220 basis points to over 60%.

Looking at our largest licensing categories.

our Warnaco jeans and underwear royalties were down about 10% for the quarter.

On a constant currency basis, Warnaco sales were down about 4% for the quarter.

The US jeans and underwear businesses were down about 15% due to sale timing shifts, and the overall challenging retail environment.

The international jeans and underwear businesses were ahead about 8% overall.

Warnaco's international comp store performance increased about 1% in the quarter.

And they have increased their estimate for new store retail square footage about 20%, to just over 120,000 square feet for 2009.

As Warnaco spoke about on the earnings release just a couple of weeks ago, their business in the second quarter was significantly impacted by a number of revenue timing shifts, which accelerated revenues into the first quarter and out of the second quarter.

Therefore, I think it is probably more meaningful to look at the Warnaco business in a total six month basis.

For the six month period, in the first half of the year, Warnaco's royalty revenues on a constant currency basis were up 3%.

So on all points, they have had a strong performance.

For the second half of the year, we and Warnaco are projecting flat royalties on a constant currency basis for jeans -- the jeans and underwear business worldwide.

And we believe we have opportunity to out perform against that, but right now we believe it is very reasonably planned.

Moving to fragrance, our fragrance business is by far our most challenged category in the Calvin Klein portfolio.

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

Again, just to remind you the two primary channels of distribution for this product are high end US department stores and travel retail, particularly duty free airport shops.

Both of these channels of distribution are under a significant amount of pressure, and it is impacting the overall business.

As we look at market share for fragrance, we have not lost any position in the total fragrance business, both domestically and internationally.

Our brands particularly Euphoria, Eternity, some of our large franchises, the CK franchise continues to perform on a relative basis against the competition very well.

In the US, our licensing partner G3 is continuing to post strong sales in the men's and women's outerwear category, as well as strong growth in women's dresses.

Both of these categories ran ahead, about 20% on a sales basis, and total G3 royalty revenues for the second quarter were up in excess of 20%.

Our men's and women's footwear licensing, Jimlar recorded sales growth of over 30% in the quarter, as we benefited from a continuation of the door growth, as well as comp store growth throughout the second quarter.

We are growing both internationally and domestically in the footwear category.

And we look for this to be an opportunity for us as we go forward.

The balance of our licensees, in all product categories posted royalty growth of about 4% in the quarter, driven by strong performance both in the US and internationally.

A number of the categories here are classification categories, and those like just suit, men's suits, and watches and the jewelry area, where Calvin clearly delivers value across, and there we had strong growth in the quarter of about 4%.

Moving on to our combined wholesale and retail businesses, sales and earnings significantly exceeded our expectations.

Overall sales for the quarter were flat, and all businesses exceeded our sales plans.

Our dress shirt and neckwear businesses continued to post strong sales performance, recording a 2% sales increase for the quarter.We continue to gain market share at all our major wholesale accounts.

Our market share percentages in the United States are up about 600 basis points from this time last year.

And we look for stronger market share growth in the second half of the year into spring 2010, as we take on some new categories.

And we believe we will be replacing some licensees in some key doors as we go, as we -- we will be replacing some key competitors in some doors as we go forward.

Our wholesale sportswear business had a very strong performance, and here we saw a dramatic shift in the business, and saw significant improvement from the trends in the first quarter.

Sales were down only 2% in the quarter beating all of our plans.

The -- our strong performance was really driven by our more moderately priced national brands, IZOD, Van Heusen, Arrow and Timberland.

They all significantly out performed their sales and margin plans at retail.

IZOD had very strong performance throughout the department store sector, particularly at Macy's.

And is growing it's market share and presentation at Macy's and at a number of the other department stores including Belks.

Our Arrow performance at Kohl's continued to be stellar.

We had strong performance in that category at -- with KOHL's.

And we are looking at market share growth there as we go into spring to 2010.

And our Van Heusen business posted very strong performance at JCPenney and Macy's.

And we are looking for a roll-out particularly at Macy's in the second half of this year and into the spring of 2010, with a door roll out in sportswear that will be significant as we go forward.

Clearly, we believe that in this environment, value, value is working, we believe our brands really deliver strong value message to consumers at price points between $19.99 to $34.99, those are the price points in the department store channel are working very, very well.

Moving on to retail, in our own retail stores, our comp store performance for the quarter was minus 3%.

That was a significant improvement from the first quarter's comp of minus 8%.

And we have seen a steady improvement in our comp store trends throughout the second quarter, and into the early third quarter.

In July, we posted a 1% comp store increase for the month.

And this improvement of 1% has continued into the first two weeks of August.

I am now going to turn the call over to Mike Shaffer our CFO, who will quantify some of these results in greater detail, particularly our guidance.

And then I would like to come back before we open it up for the Q&A to put some color on our guidance for the year, the balance of the year as we go forward.

And with that, I am going to turn it over to Mike.

Mike?

Thanks, Manny.

My comments include non-GAAP results which are reconciled on our press release.

We had a very strong quarter particularly in light of the difficult economic climate.

Our revenues for the quarter decreased 1% to the prior year, at approximately $529 million.

Our wholesale and retail businesses had a strong quarter, with revenues basically flat to last year.

Comp store -- comp sales for our outlet stores was minus 3%, and was favorable to our previous guidance of minus 7% to minus 9%.

Our Calvin Klein royalty revenues for the quarter were down $3.2 million or 6% to the prior year, which includes a $1.6 million negative impact from a stronger US dollar.

On the constant exchange rate basis, Calvin Klein royalty revenue decreased $1.2 million or 3% as a result of short falls from Coty and Warnaco.

Our gross margin for our wholesale and retail businesses was down 90 basis points to the prior year, reflecting a combination of a promotional environment, partially offset by lean inventories in the channels we operate.

Our total operating expenses for the second quarter were down $6 million or 80 basis points.

We had expense leverage in both the wholesale and retail businesses, as well as the Calvin Klein licensing business.

Our expense improvements reflect the benefit of our restructuring initiatives, as well as lower collections of Calvin Klein advertising revenues, and in turn lower advertising expenses resulting from less discretionary spending from our licensees.

As a reminder, advertising revenues for Calvin Klein are shown as revenue, and the like amount in SG&A, they have no effect on our EBIT line.

Earnings per share for the quarter were $0.60, significantly ahead of our consensus estimate and our previous guidance.

Our operating margins for the quarter were 10.9%, a decrease of 90 basis points to the prior year.

Our wholesale and retail businesses registered a decline of 60 basis points, primarily as a result of gross margin which I previously discussed.

Our Calvin Klein licensing business posted operating margins of 61.7%, 220 basis points higher than the prior year.

The Calvin Klein operating margin improvement was a result of less advertising revenue which I previously discussed, as well as restructuring initiatives.

As we look forward our strong second quarter performance allowed us to raise our earnings per share guidance for the year, to $2.30 to $2.40.

Our previous guidance was $2.05 to $2.30.

Our revenues for the year are projected today be $2.32 billion to $2.34 billion, a decrease of approximately 2% to 3% to the prior year, and an improvement from our previous guidance which was down 3% to down 4%.

Our wholesale and retail businesses are planned to decline approximately 2% to 3%, with our retail comp stores planned at minus 3 to minus 4.

Calvin Klein royalties for the year are projected to be flat to minus 2%, and reflect royalty growth on the constant currency basis of 1% to 2%, offset by $4 million to $6 million of foreign currency translation impact ,due to the stronger US dollar.

Total Calvin Klein licensing revenues are planned to be down approximately 2% to 4%, due to licensing -- due to less advertising revenues, as a result of less discretionary spending this year by our licensees.

Operating margins for the Calvin Klein licensing are projected to be up approximately 250 basis points to prior year.

Full-year 2009 cash flows continue to be projected $65 million to $75 million, and reflects capital spending of $40 million.And we continue to be prudent in our spending as we continue to invest in our business.

For the third quarter, our earnings per share is estimate today be $0.80 to $0.85.

Overall, our second half wholesale and retail businesses are planned relatively flat to the prior year.

However, our wholesale business assumes certain revenue shifts from the third quarter into the fourth quarter, due to the aggressive inventory liquidation actions taken in last year's third quarter, and our wholesale customers wanting to receive holiday goods closer to selling.

Total revenues for the third quarter, are planned down 5% to 6% to the prior year.

Our wholesale and retail businesses are estimated to be down 6% to 8%, with retail comps down 2% to 3% to the prior year.

Our wholesale and retail expenses for the third quarter are estimated to be relatively flat in dollars.

Calvin Klein royalties for the third quarter are planned to increase 1% to 2% from the prior year.

We expect minimal currency impact in the third quarter.

And with that, I will turn it back to Manny.

I guess, the last pieces that I would like to do, is just to put some color on to our projections for the balance of the year.

We have built our projections to be prudent and conservative given the uncertainty in the world.

However, given our current sales trend, and margin opportunities, we believe that they are projections that we can outperform against, given the current business trends.

Let me move to Calvin Klein first.

We are projecting royalties for the second half of the year to be flat on a constant currency basis.

Given the fact, that for the first is six months of the year, actual Calvin Klein royalties on a constant currency basis were up 2%, we believe we can outperform our projections if the current tone of business continues.

This is particularly true considering that beginning in September and October of last year, the sales comparisons become much easier as we move into the second -- as we move into the fourth quarter of the year.

We have a number of initiatives planned for Calvin Klein in the second half of year.

We spoke about these before but clearly, but our Body jeans campaign, and new product that's hitting the stores as we speak has been well received by the retailers.

The marketing campaign featuring Eva Mendez and Jamie Dornan is very sexually charged.

It's right in line with the Calvin Klein brand DNA and we believe it will be -- it has been, and will continue to be well received by the consumer.

Our Calvin Klein underwear has a number of initiatives going on, a marketing campaign that also features Eva Mendez and Jamie Dornan, but we are also focusing on updated Perfectly Fit program, on the bra foundation business.

We believe this is key to continued growth of Calvin Klein.

We are encouraged by the early selling results of Perfectly Fit.

We have added a significant amount of in-store activity for the second half of the year.

And we are optimistic that the strong performance that was seen internationally, and that this will charge the domestic business as we go forward.

In the fragrance area, Coty will globally launch a new men's fragrance under the CK franchise called CK Free.

It will be supported by a large media spend.

Shipping will begin end of August into September.

The marketing campaign will launch Labor Day weekend.

The fragrance is targeted to a younger male customer.

There will be a big internet (inaudible) sampling and other media spend surrounding the launch of the fragrance.

Additionally in the fall, Coty has made the decision to put marketing dollars behind the proven winner which is Euphoria men's and women's franchise.

We will be relaunching it with new packaging.

Euphoria, it is the largest franchise in the Calvin Klein portfolio, and it is also the largest franchise in the Coty portfolio.

Clearly they're putting their marketing dollars behind those initiatives.

And we believe that should support stronger growth than what we have seen in our business heretofore.

Moving to our combined wholesale and retail businesses, we have built those projections in similar matter.

We believe we have an opportunity to outperform our sales estimates, and our gross margin guidance as we go forward.

At retail, we are projecting comp store sales at about minus, at a minus 2% rate for the second half of the year.

Given our current comp store trend of plus 1% for the last six weeks, and the fact that beginning in September prior year sales comparisons become much easier, we believe we have the ability to exceed our sales guidance at retail.

From a gross margin projections perspective, we have two significant opportunities which have not been quantified into our projections.

We anticipate second half sourcing product cost savings of about 2% to 4%, which are not fully shown in our numbers, and we believe they are to deliver better margin than what's projected at this point in time.

And given our extremely clean inventory position, both on our balance sleet and in the pipeline at retail, we believe that we shall continue to beat our mark down and vendor allowance estimates, at both wholesale and retail, particularly in the fourth quarter.

And to put that in perspective, in last year's fourth quarter, margin rates were down over 400 basis points.

We have assumed in our guidance that we will only recapture 50% of that -- of this decline in the fourth quarter of this year, so clearly there's an opportunity to outperform on the margin side.

We think we ,are being overall on our projections prudent, but we also want to recognize the fact that we have a clear opportunity to over deliver against our estimates.

And with that, I would like to open it up to ask if there are any questions.

(Operator Instructions).

And we will hear first from Ben Rowbotham with Goldman Sachs.

Thanks, and good morning.

Good morning.

My question really was centered on the same-store sales trends.

I know last quarter, you talked about volatility in traffic.

How has that -- or has that smoothed out?

And then also, was the sequential improvement more traffic driven or ticket driven to date?

Ben, we have seen the comp store trends really solidify and stabilize in our business.

We've seen improvement month by month as the second quarter improved.

Our comps in May were minus 5, our comps in June were minus 4, and then we move to plus 1 in July, and that trend has continued into the first two and a half weeks of August.

So clearly it's been much more stable.

It has been much more consistent.

And obviously last six weeks have been much more positive.

I guess on the -- from a traffic point of view, traffic has improved somewhat.

But our conversion rates and our average unit retails out the door have also improved.

So although, although the traffic trends are better, they're not dramatically better from what they had been, but we are clearly out performing the market and the outlet environment that we are in.

Got it.

As we look at the SG&A performance in the current quarter, I think that came in a bit ahead of plan.

What exactly could that be attributed to, were -- was it cost savings being pulled forward?

There was a combination of a couple of different things, Ben.

We did experience some cost savings above our plan.

And we are actually ahead of ourselves in terms of our restructuring initiatives.

We have executed on them, on our restructuring plan.

And in addition to that, we did have savings on the advertising which I mentioned in my commentary.

We did collect some lesser revenues in advertising from the prior year, which equates to less advertising expense.

Got it.

And then just one last one.

As you look to the back half, and you look to at guidance, are you more strategically more intent on taking market share or margin?

Put differently, where is more upside probably lying?

I think -- well look -- Ben, I guess I think there's an opportunity on both areas.

Just the way we built the margin plan and the estimates, there's opportunity against our estimates, which I think is pretty significant.

But I don't want to lead anyone to believe -- it's still very promotional out there.

What is not happening, is there is not a lot of clearance merchandise to move, and that's the biggest cost when it comes to mark downs.

But we are being aggressive on our opening pricing, when goods hit the floor.

We are hitting them early to keep the consumer engaged.

We believe you really have to, you really need to incentivize the consumer to drive sales.

So we are coming out of the box very sharp on pricing.

And we think that is paying dividends for us, from a market share point of view.

and it is also keeping our inventories very clear, clean.

And based on the way we built the plan, we clearly have, we have market, margin opportunity in the third quarter, but even more so in the fourth quarter.

Great.

Thanks for taking the questions and best of luck.

Thank you.

We will hear next from Kate McShane with Citi Investment Research.

Hi.

Good morning.

Hi, Kate.

I think Manny that you mentioned in your comments, that you gained over 600 basis points of share over -- in the first half of the year.

How would you categorize these share gains, are they coming from both smaller and larger brands, and in what category?

Yes.

Well, it is both neckwear -- and when I talked about the gains, I was talking about the market share gains, specifically in dress furnishings, it's is happening both in neckwear and dress shirts.

We have, we have come in a couple of ways -- we've added some new brands, DKNY,(inaudible) We've also added going forward,the Tommy Hilfiger business, and thats significant and will intensify our growth.

And the 600 basis points improvement is really Van Heusen gaining market share, its Geoffrey Beene gaining market share, and it is Calvin Klein gaining market share.

We have expanded -- our presentation with department stores.

We think we are taking away from some weaker players in the industry, and actually taken from private label.

The nice thing about both dress shirts and neck wear is the replenishment business And as your inventory performs, you get the replenishment business.

It is not driven somewhat like the sportswear business where its based to a great deal on orders.

So you get to refill back in.

And we are just getting excellent replenishment orders -- that is helping to drive our business going forward.

So it is our, I would say, it is driven more on the opening price point business, both Beene and Van Heusen, but also the Calvin is performing well very for us.

Great.

My second question is about your cash balance which has been building the last few quarters.

How should we think about this possible use for cash in the near term and over the longer term?

I think Kate nothing has changed at this point.

We would like to see how that plays out.

Our first priority is continue to look for opportunities particularly ones that are branded in nature, and potentially opens up the opportunity for an international distribution directly.

And that is, that would be our first priority is to use that excess cash.

I think we demonstrated an ability in the past with some of our other acquisitions, to integrate acquisitions well, get them on our platform, and then maximize the potential of the brands that we brought in house.

So, that would be our first priority with the cash.

Okay.

Great.

Thank you.

Moving on, we will now hear from Bob Drbul with Barclays Capital.

Hi, good morning.

Hey, Bob.

Hi, Manny.

The first question, we talk about inventory levels, is there -- a level of clearance inventory that you can talk to year-over-over as you head into the back half of the year?

I'm sorry, Bobby.

Can you say that again?

You broke up a little, Bobby, sorry.

Is there a level of clearance activity, clearance inventory, or are inventories down 30% on clearance levels in your store?

Is there a number you can put on around the inventory level overall?

At retail our clearance inventory at this point last year compared to this point this year, compared to last year is down about 30%.

So we, and our pricing out the door is better, since we don't have as much goods.

But the real opportunity on clearance will be -- is fourth quarter when the world exploded, and there was clearance everywhere.

And even if you were clean, you were forced to promote.

So that could be a real opportunity as we go forward.

So inventories being down 8% are very healthy, but it is not only the percentage that is down, it is the quality of the inventory going forward.

Okay.

And Manny on the Calvin business, and with some of the short fall, you addressed it a little earlier but when you look at the full year for the Calvin Klein business, in the back half, given some of the slight short falls you had in the first half, can you just talk a little about your confidence level in these numbers materializing in the back half of the year?

I think Bobby -- let me address one thing first.

I guess from a -- if you look at the six month basis, from where we initially guided the year when we came out of the box, we are ahead of plan.

There were some timing issues, clearly Warnaco being the biggest one in the second quarter.

For us, it was about $1 million miss on royalty.

I think they went into great detail explaining what happened in the second quarter from a timing point of view.

In fact, they increased their sales estimates to us, in royalty estimates, for the year, although they were short in the second quarter.

So clearly, I think they spoke in great detail about the timing of some of the club shipments, some of their international distributor shipments in Europe that were pushed out in the second into the third quarter.

So I think that goes a long way to build in.

We tried to be -- now look I said at the beginning, we tried to be conservative in some of the estimating here.

For the year, for the balance of the year, we are planning that business basically flat to down slightly.

And I think there is opportunity clearly out perform that, based on the trends of the business.

And a big piece of that will be Warnaco, so if they deliver what they are saying, I have great confidence.

We build some level of cushion into the second half, on the fragrance side of the business, just with what's going on there.

And I think that is prudent given the, given the kind of expectation and growth we have experienced in that business over the last two or three years, and what's going on there, with the consumer.

So we have taken all of the risk out of the business -- out of those numbers, and we have given ourselves an opportunity to maybe overdeliver again.

Just to keep in perspective, as much -- I don't know too many brands that on balance, for a year in this environment,are putting on over all top line growth, and that is what Calvin Klein is doing over all.

It may be 1%, but it's still growth.

And I don't know of that many brands domestically and internationally that are growing in this environment.

Thank you, Manny.

Good luck.

Thanks.

We will hear next from Jeff Mintz with Wedbush.

Thanks very much.

Manny, to follow up about a comment you made earlier about sharp initial pricing on the fall merchandise, are we going to see actual prices changed on tickets from previous years?

Or is this more of a mark down strategy?

I think it is two things, Jeff.

We have sourced the product going in with planned opening promotions when the goods hit the floor to be at price points.

The MFRP's are not changing.

What we are doing is, there will be key everyday low prices that hit the floor at value propositions that we think will drive the consumer.

And it will also be driven with opening mark downs, 20% off when the goods hit the floor to entice the consumer and incentivize them to spend.

And I think that's important in this environment.

We built that into the plan, we are doing it at wholesale, in line with our key retail account -- retail customers.

And we are doing it in our own stores as well.

And I think it is a strategy that is really working well for us.

Okay.

Great.

Thanks.

And then, I don't know if Mike you want to take this, but can you talk a little bit about the split in comps between Calvin Klein and the legacy businesses, were they roughly similar, or did you see some differences there?

For the -- you are talking about for the quarter, Jeff?

Correct.

For the second quarter.

Okay.

Basically, the legacy businesses performed better than Calvin.

The legacy businesses were down about 1% to 2%, with Calvin down about 8%.

But when you look at comparisons, you really have to take a hard look at last year.

Last year at this time, the Calvin business was running up against 8%, 10% comp increases.

So it was really up against very, very strong business, which didn't turn until the third quarter.

And then I guess -- yes, just to put that into some perspective, the Calvin business for the first nine months of year -- last year was up about 9%, 9% to 10%.

And in the -- for the last four months of the year, was down 13%.

And we will start to anniversary that around September 15th, that dramatic change.

So we've also seen -- in Calvin business -- an improvement in comps towards trends.

First quarter was down close to 12%, second quarter was down about minus 8%, and in July, and early August, we've seen the business down 5% to 6%.

So clearly, we are seeing a better tone to business there as well.

It is just up against dramatically higher comp store performance last year.

Great.

Thanks very much and good luck.

Thank you.

We will take our next question from Evren Kopelman with JPMorgan.

Thanks.

Good morning.

Good morning.

I have a question on the fragrance side.

Historically, how quickly does fragrance improve as the environment improves?

Is it a -- as soon as kind of high end department stores and travel -- is it that kind of thing?

And secondly on the price points, is there an initiative to try to maybe introduce lower price points or something like that on this fragrance side?

Or is it more of -- it's either the customer wants it or not, it is not an incentivize -- its not a needs thing like an apparel .

I am going to take this in pieces.

On the recovery and what we expect -- I think -- I don't think we have experienced anything like -- I don't think the industry has experienced anything like we are going through right now in the last -- you pick the time -- 1930s -- I'm not sure.

And clearly at the high end, you are seeing that kind of pressure.

The benefit that we will see -- there's a couple -- there's two big benefits.

There has been a significant last six months destocking of inventory at retail, to the get the retail -- to get the inventory in line with the the sales plan.

So going into September of last year, fragrance business was performing -- was comping positive -- was off Calvin Klein's fragrance business.

Going into September period, inventories were very high and were planned for comp store increases and actually experienced minus 20% sales rate at retail.

So, we have had a double hit for the first six months of the sales, the actual sales trend and getting inventory levels down.

Our inventory levels are now down in line with what sales expectations are.

So I don't think we will be seeing in the second half of the year, the double hit on wholesale sales we have seen.

I mean, fragrance sales at retail are down about 1%2 to 15% while wholesale shipments are down 20% to 25%.

So that double impact I think is behind us and we should start to track more against the business.

Second piece is, once we get to September, the sales comparisons just fall off a cliff on a relative basis.

So I think it is obviously we don't expect to take another hit on top of that.

We would expect to start back -- to even off against that sales trend., and in fact may see some improvement.

So I hope that answers the first part of your question.

The second part of the question based on pricing, we are not doing anything dramatic on the price point of view.

There's incentives out there gift with purchase, we have also the CK franchise is focused to a younger consumer at a sharper price point, both domestically and internationally.

And that's clearly an area where we focused on.

But with a franchise like Euphoria or Eternity that has got such a solid market position at retail, we are giving some gift repurchases and some promotion opportunities, but we are not looking to really move the retail at all.

And we don't see any of our competitors doing it as well.

So it is an area we want to try keep and maintain the margins both for our retail partners and overall.

Okay, very helpful.

And on the other side of licensing, G3 and Jimlar, can you give us a sense of how large those businesses are, and where they can get to them, the 20% to 30% growth rates are very impressive.

I'm curious, is it growing off of a very small base?

Can talk you about that?

Well I guess -- to put it into perspective.

The G3 business overall, they have a number of categories, outer wear, men's and women's.

They have women's dress, women's suits.

They just launched the women's better sportswear in the first quarter, they took that business over.

They are quickly becoming our second largest licensee overall, probably combined, will surpass fragrance in the next six months or so.

So clearly that's a -- they're a growth opportunity and their growth is significant.

The footwear business, domestically the footwear business could be over $100 million business just on women's side, and $50 million business on the men's side.

Right now, that business is probably -- a third of that was projected to be about a third of that size in the US.

And clearly there's, we are underdeveloped in footwear internationally, and Jimlar has just taken that license over.

And we are starting to see some good growth in our own retail space, and also at -- with wholesale accounts.

So, I think those are two areas that could continue to be of significant growth for us as we go forward.

The Coty and Warnaco combined represent -- about -- I would say about 50%, a little over 50% of our royalty revenues.

So there's a -- the balance is significant of the players out there.

Okay.

Great.

And then lastly, the -- we heard from other -- your peers -- as well this trend to shipments closer to the selling season from retailers.

First of all, do you think this will continue into the spring?

And secondly, more of a -- what are the implications of this, if it continues to our business, aside from the quarterly shift of sales, is there longer term kind of risks or even opportunities if this were to continue.

Well I guess, first thing I would say, is through the first six months of the year, because of the performance that we've had in the second quarter in particular, we -- about $7 million of our sales in the quarter was driven by retailers pulling forward orders.

Because of the -- I think -- if you are performing at retail -- retailers want the goods -- because what is working, is what they need.

So for IZOD, Van Heusen, our Arrow, and Timberland businesses, and our dress furnishings business, we are really seeing retailers looking to pull goods in quicker to keep the inventory, to keep the stock in position, so we've actually are seen movement close to that.

On balance, I think retailers are trying to manage their mark downs and their clearance.

So instead of taking in holiday goods in October, they're taking some holiday goods in November.

And I think they are doing similar things and making goods closer to selling season to keep a freshness on the floor and to keep a flow on the floor.

And I think some of that -- is what everyone is experiencing as we go forward, particularly when you get the big selling periods like Christmas -- is goods that were planned to go in October last year, and now going in the first week of November.

I think it has the ability to enhance your business, if you have the logistics support behind it -- to really continue to fill in the business, and to continue to flow the business as you go forward.

And it is an opportunity to improve I think the mark down performance at retail.

If you can keep the cadence moving, and your systems are tied in well with your retail volume.

Great.

Thank you.

Next we will hear from Paula Torch with Needham & Company.

Good morning, thank you for taking my question.

My question is about the wholesale revenues coming in better than expected, and was wondering if you can talk about your inventories in the channel, are you comfortable with levels.

And can you give us a little more color on your legacy sportswear, what would you attribute the increase to, demand for our product being stronger or could you attribute some of it to your marketing initiatives with IZOD?

Okay.

I guess I would start by saying is the performance that, it is -- really I think it what is working at retail, any channel of distribution is value.

And I believe our national brands, they tend to be more moderately priced, Van Heusen, IZOD, Arrow and Timberland which is opening price collection business, those brands I think are really playing to the environment right now.

We are seeing, we are beating our sales performance at retail, I would say, that we have been organizing with our retail partners, our positions are too light retail, and we are trying to drive -- we think we're missing sales opportunity at retail and trying to flow more in behind it, and working closely with them.

A big advantage I think we have is 250 to 300 people in the field, merchandise coordinators that are keeping the goods fresh, making sure the goods are on the floor, supporting our retail partners Macy's, Belk's, Penny's, Kohl's -- supporting our key accounts to make sure that we are providing them service on the floor, to make sure the right goods are on the floor, and not sitting in the back room.

So we are getting those goods out at retail.

And the demand that we are seeing, it is always hard to say, I think clearly -- the marketing initiatives we have had in place with IZOD, I mean I think our, our senior management team has done an outstanding job positioning them at point of sale, where the consumer can really see it, coupled with the national advertising campaign, and they've really been able to activate the campaign at retail.

I think you will see more of that in the third quarter, with some initiatives with Van Heusen and JCPenney.

And you will also see a continuation of IZOD with Macy's as that goes forward.

So I think that always is a positive point of view.

But I really think is our -- the true value that our brands deliver, the consumer recognizes, we see it in our own retail business as performances improve dramatically, and we are seeing with that performance at department stores.

So, I think right now the winds -- the wind is at our back.

Great.

Thank you very much for the color and good luck.

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

Thanks.

Great job, guys.

Congratulations.

Thanks, Omar.

One thing that jumped out in the release, was the -- in the guidance was what you did at the low end of the range.

I know some folks might be focused on the fact that you didn't raise the top end of the range, but you are being appropriately conservative.

But you took the low end of the range up quite a bit.

Can you elaborate on what that means?

About what -- how you feel about the risk levels out there from a big picture perspective, the risk levels out there and the environment.

Is that, are you getting that level of confidence from your own consumer research?

What you are seeing in your stores?

Or is it more in the department store side?

Just overall consumer trends, or is it really just coming from the market share gains that you have made, or maybe a little bit of everything?

Thanks, Omar.

I guess -- just -- look, we look -- we moved the bottom guidance because we just feel that the uncertainty, inability that we saw early in the year to project the business, we really believe the business has stabilized.

We think, we found the bottom, and we are growing off of that.

As every day goes by, I feel better and better about the business because everyday we can, we have been, the last six weeks in particular, we have been consistently beating our sales and margins.

We can see the business, the order flow, we see the performance on a weekly basis, the timing with every major retail account.

So we see our performance at retail.

We are hitting plans, inventories clean, margins are good at wholesale, and our own retail stores we have a benefit I don't think everyone has.

We have a 750 window into what's going on, out with the consumer, with our store base, and it is spread throughout the United States and every state and every geographic area.

So we get a real picture of what's going on, and we clearly see an improvement in our business.

The only thing that gives me pause is what I read in the papers, and people worried about back to school.

Our back to school business has gotten off to a very strong start.

And I feel good about where we are transacting for the last six weeks.

So I can't be oblivious to what's going on around me, but the performance we are seeing in our business, both with Calvin Klein particularly internationally and our national moderate brands domestically.

We feel really good about our position.

We think our strategy of running a portfolio of brands is right, and our brands are strong, and out performing the competition consistently, and everyday that goes by makes me feel better about that.

Okay.

And then, I have a follow up on the Calvin Klein licensing.

I think Mike made a comment about the licensees, they're putting less behind the advertising.

Can you elaborate on that a little bit?

Is that more temporary thing, or you expect it to ramp up in the future, how do you see that kind of investment behind the brands?

Well, just to put in perspective, last year we had the 40th anniversary of Calvin Klein.

And we were spending at record levels across all product categories.

The advertising spend is being planned down about $7 million to $8 million overall for the balance of the full year, about $5 million of that relates solely to the 40th anniversary.

So I think on any level, we are still significantly out spending our competition, everybody else is really pulled their heads back here.

We are still spending overall, in total marketing dollars over $225 million, plus giving what's the price of media right now, our dollars are buying us more.

So I think our share of voice is growing, it is not diminishing.

And our national brand, Calvin Klein, we are spending more this year, than we did last year.

I think it is given our the strength of our balance sheet, our financial position and just the good performance, this is a good time to over spend -- or spend more than in the past, because I think you are going to put bigger share of voice because from a competitive point of view a lot of our competitors are dark, are hardly spending dollars at all.

So I think it really positions IZOD, Van Heusen and Arrow in a strong position against their competitors set.

Got it.

Last question, you made an interesting comment about taking share from private label.

What do you see there from your various retail partners?

Are they still dedicated to that, or are they starting to pull back on the importance of that, because it sounds like there might be some shelf space shifting going on out there.

And obviously there's increased risk for them carrying the inventory, et cetera.

I think -- look, let's not over drama -- let's not change -- Private label continues to be very important for our retail partners.

They believe they need distinct brands and exclusivity, so that continues to be a point.

It is a matter of balance.

It is a matter of what's performing.

What I was talking about was neckwear and dress shirts which is a significant EDI business, and you get -- you gain share by performance.

So if you -- we all have our fixtures and inventory on the floor.

And if your fixture is more productive, you gain a bigger share of the pie.

As long as the retailer continues to fill in your goods which they have, we gain more market share.

We are just more productive, and we're gaining more space because of that.

And I think the most of our retailers where they are now, it is an effective mix between private label and national brands.

So, it is just a matter of degree.

So private label still represents somewhere in between 30% and 35% of market.

So instead of 35%, if it is 32%, it is still very significant.

But, it hasn't exploded as a result of the recession?

No.

Look our experience is tha, when the environment gets tough, recession, whatever happens, national brands and value become more important to the consumer.

And secondly -- I think we have been - I don't want to use the -- we have been smart about how we positioned our brands from a pricing point of view to continue to gain market share, take advantage of our sourcing base and our savings, in order to continue to drive the promotional cadence, and gain market share, because we just don't have the clearance on the floor, we are able to be more promotional from opening price points.

Thank you.

Our next question comes from Jeff Klinefelter with Piper Jaffray.

Yes.

Thank you, and also congratulations everyone on a great quarter.

One last question from me would be on a steady state outlook Manny, for your sportswear business, given the current portfolio you have, you're taking share at retail now in a negative comp environment.

As we come out of this, whether it be next year or some run rate, at some point next year, what is a steady state growth do you think for your sportswear business domestically?

Is it going be a function of retail comps, is it going be a function of continuing to take share, just give us a sense for that.

I think in our heritage sportswear business, it is we are talking it is a share gain.

It is both, taking space away, out performing composition.

I don't think we are talking about significant door expansion on a constant basis.

We have seen both Van Heusen and IZOD gain more doors.

We, those brands work well as an all door strategy.

So if Macy's has 800 doors,Van Heusen works in all 800 doors given it's price positioning, where some higher end brands in some potentially C & D doors just don't perform at the same levels, so Van Heusen is really an excellent vehicle for them, to continue to provide a branded sportswear option, and dress shirt option across the sore.

So we are benefiting from that.

We will see more growth in 2010 as that door expansion intensifies with Van Heusen and IZOD in particular with department stores.

Then I think it is about performance and about growing, and its about us making an acquisition and adding on other brands in the portfolio.

We think there's growth potential significant with Timberland, it is about $50 million business that could be, we believe over time $150 million business.

We believe as the economy improves clearly Calvin, will regain its momentum in the collection sportswear area.

That's an area that has been under a lot of pressure at retail collections sportswear.

As that comes back, Calvin will benefit from it.

And it is one of the benefits of running a portfolio company.

It gives you the ability to take advantage and of the each of the brands strength, given the economic cycle and how your customer base is doing, that you are able to pull a number of levers and not be reliant on one brand.

Okay.

That's helpful.

So you would see your portfolio as one that in kind of a neutral comp environment, you are going to out perform the industry, at least by a few points out of share gains.

And then you are always going to have the add on acquisition potential at any given year.

I think that's concise way of saying what I said.

Okay.

Alright, thank you very much.

Good luck.

Next from Post Advisory Group, we will hear from Andrew Berg.

Hey guys, we have seen receivables drag out a little built.

Any reason to expect that trend doesn't continue in the fourth quarter of this year?

And maybe sort of bigger picture, can you give us some thoughts about how back half working capital looks like, traditionally it has been a source of cash for you guys.

Okay, Andrew, on our receivables, we were down 8% for the quarter, we are extremely clean Andrew.

We really are -- we're on top of our receivables, we're managing our business to keep our receivables as clean as possible.

We are actually a little cleaner than we were last year.

As we look to the fourth quarter -- I don't see it dragging -- I think we will continue to turn our receivables as we always have.

I think -- we don't have any issues or problems.

In term of working capital, we do see historical kinds of shift -- the historical trends in our working capital will continue in the fourth quarter.

We will -- we will see -- we will do what we typically do -- which is generate cash in the fourth -- as we move into the fourth quarter.

I think Andrew, working capital will grow with sales expectations, no more, no less -- if we are planning -- if we are in the fourth quarter planning for sales growth -- in the 2010, especially in the first half, we will build the inventory to support that, and receivables follow the sales performance.

So there's nothing, absent an acquisition, and I think -- what has happened I think in the last couple of years is we have had some brand acquisitions that have driven up inventory and receivables, and we haven't had the full benefit of those businesses in the fourth quarter (inaudible) the month.

So we have built up the receivables, and we've had to build up the inventory without associated sales coming through.

So I think that's been some of what has happened the last years, both in neck wear and dress shirt business in particular, but clearly those acquisitions have worked exceedingly well for us as we have gone forward.

And no doubt those acquisitions have worked well, and the comment about receivables wasn't a comment on your ability to collect them, as much as it was one about as concerned about how quickly your customer was paying you.

I know you guys do a good job of nudging and keeping them clean.

Thank you, guys.

Thank you.

And our next question will come from David Glick with Buckingham Research Group.

Good morning.

Manny, I was wondering if you can comment on the amount of retail restocking activity that you are seeing at what retailers moving up orders.

Obviously, you saw some benefit in Q2.

What is your ability to react to that, and do you think there's a possibility of seeing the same benefit for Q3 and Q4?

As then as a follow up to that, how --what conversations are you having about plans for 2010 for your brand?

Okay.

I think in certain categories, for us dress furnishings being one, and some basic sportswear, it is easy to, it is easier for us to react to sales trends, dress shirts in particular -- we talked about last quarter that we were building our EDI, our basic business -- our basic inventories to really be in a position to replenish EDI, we will continue to look at that as we go forward -- carry a little extra inventory that doesn't have a lot of risk.

We have been doing a number of sourcing initiatives in place, including foreign goods, moving production up in order to stay at, -- try to stay ahead of the curve.

We are not taking any -- on the flip side we are not going to take any risks, particularly on the fashion side, and carry inventory.

This environment is still a tough environment, you don't want to go to secondary channels and have to move goods, having our stores gives us a competitive advantage that we can take some risk where we see the opportunities, so we are trying to be prudent about it, and trying to react to it.

And if we have -- if we get an appropriate lead time, we can react to it.

But 30 days is not an appropriate time to try to get back in sportswear fashion.

We don't have goods -- obviously hanging around hoping for orders.

We really have the inventory in line with the order book.

And we are moving some production up in order to catch the demand.

As far as spring 2010, kind of preliminary conversations, you probably have had some retailers in by now for summer.

Yes, I think though we are trend is very good, we are getting more than our share of the open to buy.

The retailers I think are -- until they actually see in their sales performance some positive results, they're continuing to be conservative how they buy spring, and some of them initially made some plans to buy at a minus 3% to minus 5% inventory, so hoping to buy to keep inventories clean and liquid.

And we have been pushing back on that.

and getting better than that on the order book.

But as they start to see some better results, they will expand their open to buy and we will be able to capture more of it going forward.

So I don't -- we are not losing any shelf space.

In fact we are gaining it, but I think the backdrop to that is some of our key retailer accounts are still being conservative how they are managing their open to buy dollars for spring.

Great.

Thanks a lot.

Good luck in the second half.

Thank you.

And we have one more caller in the queue.

We will hear from Chi Lee with Morgan Stanley.

Hey.

Good morning, guys.

Manny, you talked about retail margins getting to about approximate% at the annual meeting in the quarter, is that 3% what is embedded in the guidance, or do you see more opportunity given the recent comp trends we have seen?

There's clearly more opportunity.

That was the guidance we were using as of the beginning of the year.

I would anticipate that they could be better-- they will be better than that going forward.

Right now, without any upside in the numbers, clearly, we are heading more towards 4% than 3%.

And if - and sales trends continue, and margins continue there is opportunity to continue to out perform.

And when that business was performing, 2004 to 2005 time frame, our retail businesses were 8% to 10% out performing margins.

So there's clearly a, a rebuild there, and we have talked about a 24 month period, but if this trend continues, we can get there quicker.

Great.

And then, in your view, the improved performance that we have seen of late, do you think your outlets, as well as the outlet channel in particular, is regaining its value proposition, as the price competition across the board abates

Yes.

I think that is -- look the outlet channel always performs better when there's more integrity in pricing at retail.

When you get into a situation like last year's late third quarter, late fourth quarter, where Sach's is 70 off, and department stores are reactive to that, and your value equation at retail is much improved.

I think you know -- let's keep in mind -- I think the price of gas is also a big advantage to us right now relatively speaking, what it was during the period, $140 now it is $70.

I don't think it is much of an issue for people get into their cars and make that investment.

Particularly if they believe that there's a value proposition waiting for them at the outlets.

And we have really positioned our brands to deliver against that value message in the outlet environment.

So, the environment is doing better, clearly much better than specialty retail.

The trends are much better, some of our competitors are seeing some improvement.

I don't think to the degree we have, but they have seen improvement in the trends as well.

Traffic is better than it is at specially retail.

And then I think we are just out performing in the channel.

Great.

Thank you very much.

At this time we have no further questions.

I will turn the call back to our speakers for any closing or additional remarks.

Thank you very much for your time today.

I understand there was a little technical difficulty at the beginning, I am being told just so everyone is not worried, all you missed was the introductions, of who was participating, and some brief opening comments that clearly were covered in the balance of the call.

And with that, I thank everyone for joining us, and we look forward to speaking with you on our third quarter earnings release call.

Have a great day.

And once again, ladies and gentlemen that concludes our conference.

Thank you for your participation.