PVH Corp (PVH) 2009 Q3 法說會逐字稿

Good day, everyone, and welcome to today's Phillips-Van Heusen third quarter 2009 earnings conference call.

Please be advised that this call is being recorded.

This Webcast and conference call is being recorded on behalf of PVH and consists of copyrighted materials.

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

Your participation in the question-and-answer session constitutes your consent to having any comments or statements you make appear on any transcript or broadcast of this call.

The information made available on this Webcast and conference call reflects certain forward-looking statements, which reflect PVH's view of future events and financial performance as of November 18, 2009.

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

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

The Company does not undertake any obligation to update public 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 on Form 8-K, furnished to the SEC in advance of this Webcast and call.

At this time, it is my pleasure to turn the call over to your host, Mr.

Manny Chirico, CEO of Phillips-Van Heusen.

Please go ahead, sir.

Thank you very much.

Good morning, everyone and thank you for joining us.

On the call with me this morning is Mike Shaffer, our Chief Financial Officer; Pam Hootkin, our Treasurer and Head of Investor Relations; and Alex Sirkin, our President and Chief Operating Officer.

Obviously, we are quite pleased with the third quarter results that we were able to post.

They significantly exceeded our previous guidance, both from a sales and earnings point of view.

Mike will quantify, in more detail, the financial results after my comments.

And I'm just going to try to put some color on each of the business segments that we operate in.

Let me start with the Calvin Klein licensing business.

Overall, our royalty revenues for the quarter were very strong.

They were up about 9% and on a constant currency basis, given the weakening of the US dollar, they increased about overall 7%.

Operating income in the quarter increased year-over-year almost 30%.

If you look at our largest categories of licensing product, our Warnaco jeans and underwear royalty revenues, for the quarter, were up about 1% and on a constant currency basis were flat to down slightly.

If you look at it geographically, the US jeans and underwear business was down about 9% due to sales and timing shifts and also, the challenging US department store environment.

Our international business in jeans and underwear continue their very strong performance.

Business there was ahead, on a constant currency basis, about 6%.

If you look at it from a retail point of view, the international comps for jeans and underwear increased in the quarter a little over 3%.

Warnaco continues to target retail square footage growth this year of about 20%, which translates into about an additional 120,000 square feet of retail space.

From a product point of view, we're seeing an excellent response to the Body Jeans launch, both domestically and internationally.

There's been strong order fulfillment in the third quarter going into the fourth quarter and we've seen a reordering of business going on there.

So, we're very pleased how that business has launched and how that business has been supported by just a tremendous marketing program both internationally and domestically.

As we look out into the fourth quarter for jeans and underwear, we're planning the sales up there -- the royalty revenues up there 4% to 6% on a constant currency basis.

And we continue to anticipate strong international growth, while we anticipate that the US business will level off to be up slightly for the fourth quarter.

Moving on to our fragrance business, which clearly through the first half of the year has been our most challenged business.

Through the first half of the year, sales in fragrance were down about 25%.

As we move into the third quarter, we've seen a significant improvement in that sales trend.

Sales for total fragrances are only down about 6% in the quarter.

We've seen a very good response, particularly internationally, to our CK Free men's fragrance launch that we started to ship beginning in September of this year.

Our large fragrance franchises, Euphoria, CK and Eternity, are all seeing positive sales momentum at retail and we're also seeing a restocking of inventory levels at retail.

For the fourth quarter, we're planning our fragrance royalties up mid single digits, given the positive momentum we see in the business so far in the third quarter.

And as we see some order flows that are coming through early on in the fourth quarter.

So, we think it will be a reasonably good holiday season for fragrance, particularly considering the weakness that we were up against next year.

So, we believe that business has started to turn around and we have a number of exciting initiatives that we'll talk about more in our fourth quarter press release/earnings call, with new launches in the fragrance area for next year.

In the US, our licensing partner G-III just continues to post outstanding sales performance.

In particular, men's and women's outerwear category, as well as strong growth in the women's dress category.

Both of these categories ran ahead of plan for the quarter and royalties for the quarter were ahead about 25%.

So again, our G-III partner doing an outstanding job for us, particularly on the women's side.

We're also seeing very strong performance with our women's sportswear business.

They're seeing good -- excellent sell-throughs.

There's a commitment to additional space as we go into 2010.

And there's a commitment for more square footage within the existing space that we're in.

So, there's a lot of momentum going on the women's side of the floor, particularly in the dresses, outerwear and sports area.

In the footwear area, our licensee Jimlar continued to post very strong results.

Sales for the quarter were up over 30%.

We're benefiting from a continuation of strong door growth, as well as comp store growth in existing doors.

And that growth that we're experiencing in footwear is both domestically and internationally.

As we look at the balance of our licensees, we're seeing very strong performance in all categories, we posted about a 6% to 7% growth in royalties from all our other licensees.

That was driven both by strong performance in the US, as well as internationally.

I'm going to move now to our combined wholesale and retail businesses.

Sales and earnings significantly exceeded our expectations in the quarter.

Overall, sales were down only 1% for the quarter, which was about $30 million higher than our previous guidance.

Sales were higher than planned in all of our major businesses, sportswear, dress furnishings and retail.

I'm going to start with our retail businesses.

At retail, our comp performance for the quarter was plus 6%.

That's a significant improvement over our first half comps, were about minus 5% to 6%, as well as a significant improvement over our guidance for the third quarter, which was minus 2% to minus 3%.

We have seen a steady improvement in our comp store sales trends throughout the third quarter.

And this strong positive sales trend has continued into the third week of November, with comps up over 6% month to date in November.

This positive sales momentum, coupled with very clean inventories at retail and down about 10% year-over-year in our retail stores, puts us in an excellent position to deliver very strong sales and margin results for the holiday season in our retail stores.

Let me move on to our wholesale business.

The story in our wholesale business is very similar.

We beat our third quarter sales plan by about $15 million.

Overall, our wholesale business has continued to outperform their retail sales plans with our customers and continued to take market shares from our competitors.

Our market share gains are most visible in our dress shirt and furnishings area, where we have a dominant market position and presentation.

Over the last 18 to 24 months, we have seen a our department and chain share in the dress shirt market grow from about 35% in 2007, to about 45% through September of 2009.

Our market share in neckwear has seen similar growth as we've added new brands.

The gains in these two categories have come from two places, they've come from new labels that we've added, such as Tommy Hilfiger, DKNY, Jerry Garcia and Joseph Abboud, as well as very strong sales growth from our major brands, Van Heusen, Calvin Klein, Arrow, Kenneth Cole and Chaps.

When we look at our dress furnishings gains, we don't believe that -- we believe that we will continue to see growth into 2010.

For our spring sales plans, we're working with our retail partners and we're seeing growth in those categories.

In particular, we're seeing market share growth with Macy's, as we've agreed to take a number of our competitors off of the floor for the spring selling season.

And we've agreed to really support that financially by taking those competitors off the floor and replacing them with our brands.

In neckwear, we've reached an agreement with Wal-Mart to take over running of their neckwear business at retail, starting with the second quarter of 2010.

We'll begin to ship goods to them beginning in June of 2010.

This is another area where we've agreed to financially support our retail partners, we've provided for that in the third quarter by taking that inventory off the floor and clearing a lane for us to ship our product in, beginning in the second quarter of next year.

Both with those two very large customers that we have.

Moving on to our wholesale sportswear businesses.

We continue to have very strong sales performance there.

Our brands, I'll speak about each of them individually, our moderately priced brands, IZOD, Van Heusen, Arrow and Timber are significantly out performing their sales and margin plans at retail.

Our Timberland business, as I mentioned to you on the second quarter earnings call, we began shipping to 300 additional doors in the fall selling season.

We've seen excellent response at retail with those goods.

Timberland is one of the best performing collection brands on the floor today.

We think the formula works.

We like the brand very much.

We think it resonates with the consumer and we have positioned it, from a price point of view, to be very competitive and compelling with our customers.

And the performance demonstrates that.

Our IZOD business, particularly in department stores, continues very strong.

We are -- our men's business continues to out perform the competitive set.

We continue to get more space on the floor.

We believe our marketing investments that we're making behind our IZOD brand, particularly the IZOD Indy sponsorship, that started this year and intensifies in 2010, we believe works very well for us.

We believe the partnership there with Macy's has really helped us to synergize that marketing message to get more dollars -- to get more bang for our dollars as we go forward.

We are activating at retail with Macy's in stores and bringing compelling marketing to the store level.

And we think that's translating into market share growth and strong sell-throughs at retail.

With Van Heusen, we're seeing excellent performance with the Van Heusen brands in sportswear.

We believe the value message that Van Heusen delivers, is a strong national brand at compelling prices, really works very well for us.

We believe that our marketing message there with the National Football League and the Pro Football Hall of Fame has really worked very well for us.

We're intensifying that relationship as we go forward and we're increasing our marketing spend as we go into the fourth quarter, with the Van Heusen brand behind the Pro Football.

You'll start to see that more significantly with the Thanksgiving weekend, both on football and with the Macy's parade.

So, we're excited about that.

Our Arrow business at Kohl's continues to be very strong.

We continue to be the number one sportswear top brand in the store.

Our dress shirt business there continues very strong and we're very happy how we're positioned with Kohl's and how we're growing with the Kohl's business there.

Finally, our Calvin Klein men's collection sportswear business.

Beginning in fall, we started to see a turnaround in that business, where we are posting positive results against retail sales plan and against the prior year.

That business is significantly back on track.

We believe we are priced appropriately there.

We are driving product at value prices, principally with our major department store accounts.

And we're very happy with the performance of the Calvin Klein men's sportswear business.

I touched on our marketing spend and our decision to, one, increase our marketing spend for the year about $5 million.

And to shift some of the spending out of the third quarter into the fourth quarter.

That decision is really a result of what we've seen at retail and the performance of our brands at retail and our decision to continue to go after market share at retail.

And we believe that's paying off for us.

We've intensified our Calvin Klein spend.

And we think we'll now be year-over-year, 2008 to 2009, our marketing spend will be even year-over-year.

And that's a -- where we had initially planned that marketing spend to be down about $5 million.

And we believe in our legacy business, we'll be ahead $2 million in our marketing spend year-over-year.

When you consider, from a marketing point of view, that I think a number of our competitors have significantly reduced their marketing spend, particularly in the second half of the year or have actually gone dark.

Couple that with the fact that our marketing dollars are clearly buying us more this year, as you can -- as rates are down both in print, television and in outdoor.

Then, we believe we are really grabbing a bigger share of voice out there.

We believe we are cutting through and being seen.

And we think this is the time to spend marketing dollars and gain market share when times are a little rocky, not when times are great and everyone is performing.

So, we believe our performance supports the additional marketing spend as we go forward.

With that, I'm going to turn the call over to Mike Shaffer to quantify some of what I said.

Thanks, Manny.

The comments I'm about to make include non-GAAP results and comparisons.

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

Revenues for the quarter were $697 million, approximately flat to the prior year and approximately $40 million greater than our previous revenue guidance.

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

Our wholesale and retail business revenues were down 1% to the prior year.

Strong comp store sales of plus 6% in our retail stores was offset by mid single digit declines in revenues in our wholesale divisions.

Where there was a planned shift in the taking of goods by our customers in the third to the fourth quarter, as they have a desire to receive merchandise closer to the holiday selling season.

Gross margin for the quarter was 48.6%, up 60 basis points to the prior year, driven by strong sell-throughs in our wholesale and retail business.

Earnings per share for the quarter was $1.08, which was $0.23 ahead of the top end of our guidance.

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

Cash at the end of the third quarter was $357 million, up approximately $160 million to the prior year.

Cash flow for the year is projected to be $80 million to $85 million, up from our previous guidance of $65 million to $75 million.

For the quarter, our inventories were down 14% from the prior year.

Inventories are very clean, both in our own stores and in our wholesale accounts.

Receivables for the quarter were also very clean and down 11% to prior year.

We'll move to our guidance.

We have increased our full year earnings per share guidance to $2.59 to $2.63, which reflects our strong third quarter performance and is a significant increase from our previous guidance of $2.30 to $2.40.

We have also increased our revenue guidance to $2.37 billion to $2.38 billion, which also reflects our strong third quarter results.

For the fourth quarter, we're projecting earnings per share of $0.38 to $0.42.

Revenues for the fourth quarter are planned at plus 4% to plus 6%.

Calvin Klein licensing revenues are projected to increase 9% to 10%, continuing their strong third quarter performance.

Our wholesale and retail revenues are planned up 4% to 6%, with comp store sales at plus 2% to plus 3%.

Gross margin for the fourth quarter is planned up about 250 basis points.

Our expenses for the fourth quarter are planned to increase about $25 million.

Driving this expense increase is additional marketing expenses of $10 million in the fourth quarter, which reflects the timing of $5 million, as we shifted marketing expenses from the quarter three to quarter four.

As well as an additional $5 million of incremental marketing spend in the fourth quarter to support additional programs.

In addition to the increase in fourth quarter marketing expenses, our incentive compensation expense is also up about $10 million in the fourth quarter.

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

Thank you.

(Operator Instructions).

And we'll take our first question from Jeff Klinefelter with Piper Jaffray.

Yes, thank you.

Just a couple of questions for you, Manny.

One would just be on the current dynamics of sales trends, both your own retail stores and the department stores.

I understand there's been at least a modest improvement here in the last few days and certainly for your own retail stores.

But can you talk a little bit more about the environment overall?

Are you seeing it pick it up and track where it needs to be or should be to hit your plan?

And also, what's the current inventory position out there in the marketplace?

Okay.

Let me start -- I'll start with the last point first.

Obviously, you guys are students of the game.

Inventories are very clean at retail.

The inventory position at retail is tight and that, I think, is a good signal for gross margins.

The retail trends at this time of year, we're all looking at this day-to-day, week-to-week.

It gets a little crazy.

We focus in so microscopically.

But October was exceedingly strong.

Everybody knows the same thing, business seemed to have pulled back the last week of October, the first week of November.

We've, in general, seen improvement off of that from that pull back level.

Our own retail stores, we saw a little bit of softness that last week of October and then beginning of November, sales got back on track from where they were for us at excess of plus 6% month-to-date.

With our retail partners, they're probably better equipped to give you more detail but we are very happy with the way we've seen our own product perform week-to-week at retail.

We continue to perform at or above plan levels.

And we think we're in a position to deliver or exceed the results that we talked about for the fourth quarter.

Okay.

Thank you.

One other question, when you get to your dress shirt category, you've talked about 45% market share.

Also, talked about expanding, maybe, a little further now into the discount channel.

How high can your market share go, Manny, in that kind of core category for you before the retailers just start pushing back and saying that it's too much dependence on one supplier?

I'm going to make Allen Sirkin answer that, the dress shirt king speak to that.

The number quoted by Manny, the 45%, represents a penetration within the department store channels, which takes us from the mid channel through the better department stores.

There is opportunity outside of that channel to expand both the dress shirts and neckwear opportunities.

We are exploring those with some specialty retail partners and there feel that there is a somewhat of an elasticity there, maybe as much as another 5 points over the next year or so.

So, we will continue to push the envelope.

We feel our core competency in both of those categories will enable us to continue to migrate past the department stores, as well as in the department store channel.

Jeff, and the only thing I'd add is, we added -- with our acquisition of Superba and as we've added the logistics behind the business.

Dress shirts and neckwear, to a degree, are very -- need a great deal of logistics behind it to keep our customers in stock, to service on the floor.

We have over 300 coordinators in the field and none of our competitors can really answer that.

And having that, I think you get to a point where you represent some 50% of someone's dress shirt department or 60%, I'm not sure it matters about worrying about if you're too big for the floor.

If that's part of your question.

So I think, clearly, we've convinced our partners with the stable of brands that we've had, with some of the exclusivities that we give with some our brands, that we're there to grow their business, not to protect our market share.

And we allow the brands to grow.

So, I think that confidence has grown over the last two years.

And we've demonstrated an ability to continue to out perform the overall department and performance gets you more market share.

So, Manny, what kind of annual -- kind of compound annual growth do you think you can generate out of that tie and dress shirt combined category?

We've always talked about neckwear and dress shirts being a no growth category but I think over the next two years, we can grow the category 2% to 3% overall.

Okay.

Thank you.

And now, we'll hear from Bob Drbul with Barclays Capital.

Hi, good morning.

Manny, the two questions that I have.

Can you elaborate a little bit more on the wins at Macy's in terms of the brands that you're taking over sort of the door counts or the magnitude of the wins that you're talking about there?

And similarly, can you give us a little bit more detail on the Wal-Mart neckwear business in terms of what brands you're going to use with that?

And how we should think about the financial commitments that you've made to both Macy's and Wal-Mart?

Sure.

I think I'll take the last first.

On a combined basis, we've provided about $5 million in the current year-to-date to deal with the liquidation of those inventory programs going forward.

When you think about the -- I'm not going to get into the labels.

That's for my competitors to talk about later.

We're talking about, with Macy's, probably a $10 million additional sales opportunity on the floor.

So, taking over those programs on an annualized basis, we probably won't take them over until mid second quarter.

So, next year, it could be worth $6 million to $7 million.

So, that's the Macy's piece.

The Wal-Mart piece, it's a private label program.

It will be their label.

We believe it's going to be the George label.

That hasn't been finalized but we believe it's going to be the George label.

We'll be utilizing our design staff to design the product.

We'll be providing in-store coordinators to service the floor, make sure that the floor is fully serviced in their major doors.

And we believe on an on annual basis, not next year but probably 2011, that it's a $15 million to $20 million business.

And next year, it's a $10 million business for us.

So, we're excited about both of those programs and working more closely with those two customers.

Great.

And then, one other question I had, Manny, is can you talk a little bit about what you're seeing for spring orders a little bit by brand, if you would?

And sort of how you're thinking and planning for your own retail business for the spring period?

Sure.

In our retail business, as we've started to roll out, we've been chasing all year and have been able to keep the flow of goods going.

So, clearly, we never anticipated a plus 6% and we're able to see that going forward.

We're planning the spring -- we're planning the first six months of next year, from an inventory point of view, from our own stores, at a comp of about plus 2%.

Clearly, if the -- as we watch the holiday season progress and we get more comp, if we can see more positive results, we'll become more bullish in those areas and chase after those goods.

And I believe, with our open to buy dollars, buying at 2%, you could do 200 to 400 basis points higher than that.

So, we're trying to be prudent end at the same time, want to be aggressive about going after the share.

With our retail partners, in sportswear, we're seeing right now spring sales plans that are still a work in process.

But right now, I'd say our spring sales plans are probably up about 4%.

It's really going to -- we've seen an acceleration of deliveries.

We've seen that for the first half of this year, we're planning that.

The February goods will be -- initial plans will be delivered in January.

And we'll continue to see that push forward of goods, given the sales momentum we've seen in our brands.

And we are now really finalizing our accounts, 4/25 deliveries, 5/25 deliveries, to see if there's more opportunity as we go forward.

That's a work in process.

And it's a pretty similar story in our fashion, dress shirt and neckwear business, where we do get some orders, it represents about 35% or 40% of our business in similar kind of numbers in that 3% to 4% range.

With us building our EDI and pivot stocks behind it to really support the business.

For the last 2.5 months, we've been chasing dress shirt business.

And we haven't been fulfilling at the usually high rates that the 98%, 99% range, only because we just can't keep up with the inventories.

I think we get back in position there, beginning December 1 but it's been a constant trying to keep filling that pipeline.

So, that's what we're seeing.

I think most of our partners continue to talk about spring being anywhere from flat, plus 2%, minus 2%.

I think we're getting a bigger share of the pie and that continues with some of the order flow that we've seen with our goods.

Great.

Nice quarter by the way.

Thank you.

And now, we will open the floor up to Goldman Sachs, Benjamin Rowbotham.

Thank you.

Manny, I was hoping you might give a little bit more color on the delta in the fragrance business at CK.

How much of that was driven by changes in travel spend versus core department stores?

I think, Ben, the improvement has been pretty consistent in all channels.

It's a combination of better demand, significantly less promotional going.

Fragrance is usually not a category that gets discounted but, obviously, this time last year, it was being discounted to get through inventory.

That's not happening today.

So, there's no real promotional activity going on above the normal levels.

And so, retail sales performance is strong against last year's numbers.

And retail inventories are being restocked to stronger levels and to buy back into the sales performance.

And that's happening internationally, it's happening domestically and it's happening even at travel retail off of the lower levels.

So, we're seeing it in most, most areas of the Company.

Thanks.

That's helpful.

And then on the gross margin guidance, talking about getting 50% of the loss profitability back year-over-year.

Maybe if you could talk a little bit about the sensitivities to that assumption, where the upside drivers are?

I know that you've mentioned, in the past, sourcing costs were going to be down 2% to 4%.

Is that baked in now?

What are the puts and takes?

Look, the margin expectation right now, it has everything baked in but there's clearly opportunity to out perform.

The opportunity is really on the allowance and markdown line of our P&L.

We feel really good about where inventory is positioned.

Overall, our inventories are down 14% and our inventories at retail are down a very similar amount.

So, we're in an excellent position to out perform our allowance plans and our markdown plans at retail.

I think when you think about it, just to put things in perspective, I don't have the exact.

In round numbers, we're planning for about 50%.

To get back about 50% of the improvement.

So, if our gross margins were down about 500 basis points, we're anticipating about a 250 basis point improvement.

I think there's an opportunity to capture another 100 basis points.

I believe -- I think it is -- I don't think you get back, in the short term, to 2007 levels until we get back to a 2007 economy.

You need -- if you're going to perform at retail, you continue to need to be -- to deliver a strong value message when you hit the floor.

You can't wait to go on sale.

You can't wait for clearance.

You have to have a compelling message with the consumer.

Our heritage brands clearly deliver that.

Our high/low strategy with those brands, IZOD, Van Heusen, Arrow, clearly deliver that message to the consumer and it's working very well for us.

In our collection businesses, Timberland and Calvin Klein, we are priced appropriately in order to drive a value message as appropriate for those brands against our competitive set.

And you just can't sit there.

So, I think there's an opportunity but it's not the full 250 basis points.

That wouldn't be reality.

Thanks.

And then, lastly, going after market share in tough times, it's a smart strategy.

What do you see by way of marketing spend?

How do you see that unfolding into the first half of 2010?

Could we see these elevated levels continue on?

Well, let's -- so we put it into perspective is, we are spending this year the same amount we have spent in 2008.

And I would anticipate that we'll spend a similar level in 2010.

So, with sales gain, could you grow as a -- we'll keep the percentage of sales very similar.

So, we'll see only modest growth in expenses.

We've diverted how we spend a lot of our marketing dollars, particularly on our heritage brands.

We have partnered more directly with our retail customers, our largest ones, Macy's with IZOD, JCPenney with Van Heusen, and Arrow with KOHL's.

And we'll continue to invest with those retailers to synergize our spend.

To put the spend together with our retail partners to get a bigger bang for our buck.

And that seems to be working for us.

It works for us both at the consumer and obviously, it works with us for the customer, that if you're spending the marketing dollars at their point of sale, they're willing to invest and open to buy dollars behind you.

Great.

Makes sense.

Thanks for taking the questions and best of luck with holiday season.

Thank you.

And now, we'll hear from Paula Torch with Needham and Company.

Yes, good morning, thank you for taking my question.

I was wondering if you could talk a little bit about the performance at Calvin Klein collection?

I was wondering if you are seeing any signs of recovery in the luxury consumer?

And any sort of color there would be helpful.

Thank you.

Well, for us, the collection business is the brand marketing halo for us.

It's a relatively small business.

What we are seeing is, from a gross margin point of view, from an inventory positioning point of view, clearly last year's blood bath is not occurring.

They promotions are very rational now, as opposed to this time last year, 75% off sales.

That won't occur this year.

There's just not the inventory to drive that.

We've had some good winds with the Calvin Klein collection business at Saks and Bergdorf and we've broken through.

And our positioning there has really helped us from a global marketing point of view.

The area -- luxury is still an area that's under pressure.

Has it improved and stabilized?

Yes.

But it's still not anywhere near 2007/08 levels.

So, it's a category that's under pressure overall.

It's a relatively small business for us but we've particularly like what's happening from a marketing point of view for us as we're getting more positioning in major stores, not only in the United States but also internationally.

Thank you for the color.

Good luck for the holiday.

Thank you.

Now, we'll open the line up to Eric Beder with Brean Murray.

Good morning.

Congratulations on a great quarter.

Thank you.

I know you guys have been accumulating a lot of cash.

Could you talk about what your kind of thoughts process on uses for the cash, since you're probably net cash positive next quarter?

Yes, very consistent with what we've said in the past.

We would like, all things being equal, to utilize our cash, to continue to make strategic acquisitions.

We believe we've demonstrated, over the last really the last 10 years, with the Calvin Klein acquisition, with the Arrow acquisition, with the Superba acquisition, if you go further back to the IZOD acquisition I think we've demonstrated an ability to bring acquisitions in-house.

Not to into trouble with the integration.

To maximize the business opportunity.

Synergize the back office.

And do pretty significantly accretive transactions over time.

And that would be, by far, our preference.

I've also said, we're not a bank and we're not going to just accumulate cash over a period time.

But I think we are entering a period where we're going to, hopefully, see more opportunities for acquisitions over the next nine to 12 months.

And I'd like to utilize the next nine to 12 months to really flush that through to see if there's opportunities and what kind of opportunities are available.

And how we can put our assets to the best use for our shareholders.

If we just -- if those opportunities don't materialize, we will look at our capital structure and do what makes sense.

We're not going to just accumulate hundreds of millions of cash.

But I think where we are right now is a prudent place to be, considering what happened last year.

We were very happy to be in such a positive cash position and a strong financial position.

So, that's where our head is at right now, Eric.

Okay.

And just in terms of the My Macy's program, how is that working out and kind of where do you see that going?

I'm going to let Allen take that.

My Macy's, their new initiative is evolving rapidly, as they fill the voids in organization and the regional markets.

We're finding that the centralization from the corporate side has helped us tremendously in running an efficient planning process, brand management process, and then having the support from the field to customize the assortments is working very, very well.

We've taken advantage of the My Macy's focus to layer on our marketing initiative, which was the Indy Racing League in all major markets.

The My Macy's focus allows us to into regional markets and stores and develop special programs to help support the brand at a regional level, as well as at a national level.

So, on all basis, we like what's happening and we think that we've been able to capitalize on it.

We are a VIP partner and therefore, we are certainly holding hand-in-hand in the evolution of that strategy.

And now, we'll open the floor up to Evren Kopelman with Wells Fargo.

Thank you.

Good morning.

Morning.

My question is on the pricing.

On your last conference call, you talked a little bit about the fall sharper opening price point, as well as some of the opening markdowns.

How is the consumer responding to that?

Is the recent strength you're seeing, you think, as the result of these strategies or it's just easy comparisons and improving macro trends?

And also, for the spring season, how are you thinking about price points at your retail partners?

Are we going to see a similar sharper price point strategy?

Yes, I think it's pretty clear that the value is winning today.

Whatever channel of distribution you walk into, whatever that means to that channel of distribution and for those brands.

I think, if you look at most retailers' performance and if you look -- and if you break it down.

I think you'll see that the stronger component of their business, no matter who you are, tends to be to the more value-oriented products that you offer.

And if that's -- if you look at Macy's, I think their collection business is probably -- it hasn't performed as well as the overall store because the classification business is sharper price points.

And some of their private label, coupled with national brands like Van Heusen and IZOD at compelling prices, is really driving where the consumer is spending their money.

We believe that that the trend going to continue, as we look into our crystal ball, at least throughout next year.

And we believe that having a very strong price value message is critical.

And we've utilized our pricing and our cost savings in order to fund some that.

But where the real funding is coming is from, is less on markdown allowances than in the prior year.

If you could hit the floor and instead of getting 30% sell-through at first retail price, you're getting 40% or 45% sell-through at first retail price.

That's going to significantly reduce your second, third and clearance markdowns and that's where the big dollars are.

And that's how we've consistently, throughout this year and last year, consistently have out performed our margin plans going forward.

So I think value wins.

I think that's going to be that way for the foreseeable future and I think that bodes well for our stable of brands.

Great.

Secondly, on sourcing costs,it sounds like you're picking up some incremental business for next year, Macy's Wal-Mart.

How do you see sourcing costs shaping up over the course of next year, as demands picks up a little bit?

Do you -- if you can comment on that?

Spring prices, we're seeing some benefits in spring, not as significant as fall but we're seeing benefits in spring, some level reduction.

As we go to fall, prices are becoming tighter.

I can't put a lot more color on it than that.

It's a little too early.

But clearly, as demand seems to be picking up, as the factory base continues to shrink out there.

And the dollar hasn't -- the weakness in the dollar has an impact.

Cotton prices, they can go through all of these things.

But when you really cut through it all, it really comes down to a demand issue.

And as demand improves and stabilizes around the world, I think we will, as an industry, start to see pressure on costs going forward.

Some things you can do about that, sourcing and the way you make goods.

And there's some things that you can't avoid.

So, I would anticipate, as we get into fall and then 2011, that at some point, we're going to see some increases in prices.

We haven't seen that in 10 or 11 years in the apparel industry, as duties and quotas have gone away.

Very helpful.

Lastly, can you update us on your store closing plans?

With the significant improvement in comps in your retail stores, is there any change to those thoughts or is that still on track, the number of store closings?

As we look forward, we'll target over the next three years, probably about 100 to 125 stores closing.

Our results are better and it's getting more difficult to walk away from those stores.

We'll measure them, as we do every period, to determine if and when we want to close those stores.

And one of the unique features -- our stores that aren't -- we don't have stores that lose a lot of money.

Our outlet stores that we talk about closing, tend to break even or have slight losses.

So, we don't buy out the leases, we tend to walk away at the end of the lease terms.

And that's where we are today.

And the only think to Mike just said is, I'd add two points.

One is, the points you made is, as the comp stores have improved, they've improved in those stores and somewhat changed some of the economics.

And then, when we sit down with our landlord to walk away from the lease, we're usually able to negotiate a deal that reduces the rent and keeps the lease term relatively short.

And relatively short could be six months to 12 months.

And given those incentives, a lot of -- we're coming to the decision that it's -- in a lot of cases, it doesn't make sense to close the store.

It makes sense to keep the store operating.

And that's why there's 100 to 125 today, compared to the 150 just four or five months ago.

So, that's where we are in the curve and if business were to continue, that number could come down a little bit more.

Thank you.

And we'll go to Emily Shanks with Barclay's Capital.

Good morning.

Thank you for taking the question.

I was just curious, Manny if you could give us a little color around airport store performance?

I know that over the past couple of quarters, that's been a topic around international tourism and so forth.

Could you address that please for the third quarter and looking forward?

Well, I really can't speak to airport stores because it's for us, with the exception of fragrance and we don't operate that business directly, it's not a business category that we would operate in.

I can speak to international tourism in the United States and travel to the United States.

The negative impacts of this, that we saw in the fourth quarter of last year through the first half of this year, with the strong dollar, less international travel, that trend has reversed itself.

Obviously, the dollar has significantly backed off.

The value equation for tourists, both from Europe and Asia, as well as Canada and Mexico, where a lot of our stores get a significant amount of play, what we call our border stores.

That sales trend, in those stores, have significantly improved over the last three or four months.

And we expect we'll continue to improve as we go forward.

So, that's been a big positive for us in our own retail stores.

And I believe tourism in general, with our department store accounts, there some major markets likely where international tourism is a big component of the sales that take place in those markets.

And we're seeing improvement in that as well.

So, that's the color I can give you from the internation tourism on our business.

That's extremely helpful.

Thanks.

Good luck.

Now, we'll hear from Omar Saad with Credit Suisse.

Hi, guys.

This is Spencer [Hill] in for Omar with Credit Suisse.

Nice improvement in comps over the course of the quarter and very encouraging November, plus six months to date, especially in the context of choppier results elsewhere in the marketplace.

Could you talk about the 2% to 3% comp guidance for 4Q and kind of what underlies that slow down, whether it's conservatism?

And secondly, whether you can touch on the two year comp trends, if you have that?

Sure.

To put it -- look, plus 2% to 3% just strikes us as a reasonable, prudent place to be right now, just given where the world has been overall.

If somebody said to us six months ago we're going to do 3% comps in the fourth quarter, I think we all would have been thrilled with that result.

I do understand that the current momentum in trend is better than that.

But again, I think the big shopping season is really ahead of us, beginning with Thanksgiving, Black Friday and where we are.

So, we really want to see how that plays itself out.

On a comp trend, as I think you know, last year's fourth quarter was by far the weakest quarter that we reported.

Last year's fourth quarter, overall, for our businesses all-in was minus 8%.

The Calvin Klein business was negative double digits last year at this time.

Our heritage businesses, legacy businesses were more like minus 6%.

So, to just to give you a sense of those businesses.

So, we are up against weaker comps.

We had 10% inventory, which I think is fine and can clearly drive a 6% or so comp store increase at very healthy margins.

So, we're optimistic about -- that we can out perform but we have a lot ahead of us as we go forward.

And the choppiness that's surrounding us, even though we haven't been experiencing it directly, did give us some pause as we look at the fourth quarter guidance.

Great.

Thanks very much, Manny.

And now, we'll open the floor up to Andrew Berg with Post Advisory Group.

Hi, Mike, just a quick question for you regarding working capital.

Last year, the benefit was about $25 million, $26 million larger than it was in the prior year.

Can you give us some thoughts on how we should be thinking about the working capital benefit you get in the fourth quarter this year?

A couple of things.

I think you know our business, Andrew, we tend to -- working capital tends to move with our growth and our decline in our revenues.

However, last year, we did all get caught in the third quarter.

The world came to a screeching halt.

Our inventories in our stores and what we were going to ship to our customers was higher than it should be.

We took the right reserves but we didn't get it -- but we still had to down throughout the year.

So, I think as we look to the fourth quarter, I'm expecting some improvement over last year.

And we should be able to manage from there pretty much back to the old method of moving with sales.

And when you say improvement over last year, am I supposed to think of that in order of magnitude?

That working capital benefit in the fourth quarter is slightly higher than the working capital benefit from last year or lower?

It will be lower, Andrew.

Definitely.

It will be sort of the fourth quarter in February '08?

Yes, but just to put it into perspective, last year, from the third quarter to year end, we were driving inventories down to get to the new sales demand, which was minus 10% sales trend.

So, we have a reversal going on.

The sales trend now, probably, we'll be planning spring up.

So clearly, if you're going to plan spring up, you need inventory.

We're also planning sales up in the fourth quarter based on the guidance we gave.

So, receivables will be up year-over-year.

And our net debt position at the end -- our net debt position, cash position is $160 million improved third quarter to third quarter.

And I think the guidance we have is closer to $85 million at year end.

So clearly, working capital is going to be a negative in the third to fourth quarter, as we've built in working capital to support the business.

But for the year, we should generate about $100 million of free cash flow.

Clearly, you guys are doing a great job in terms of running the business and generating cash.

So, keep up the good work.

Thank you.

And now, we'll open the floor up to David Glick with Buckingham Research.

Good morning.

Congratulations on the quarter.

A quick question on Calvin Klein.

A big improvement in the trend in Q3 and then forecast for Q4.

How do we think about this run rate going forward?

Clearly, your biggest license.

You're forecast an improving trend at Warnaco and they've put out some fairly aggressive growth rates over the next five years.

Can we expect to see mid to high single digit growth in Calvin Klein licensing going forward, or do you see the growth a little bit less than that?

David, a couple of things.

When you look at it, I don't think there's any reason to believe that we can't have top line growth in the 7% to 9% range as we go forward, similar to what we've delivered in the third quarter and what we're projecting for the fourth quarter.

There's a lot of variables in that.

And one of those is the dollar.

What the reaction is there?

But on a constant currency basis, what we're seeing going on internationally, the plans that our licensing partners, internationally, for retail store growth, the Warnaco numbers I talked about.

There's also Club 21 throughout China.

And Asia continues to be a real growth story for us and they continue to open square footage and open stores as we going forward for the brand.

As strong as it is domestically, the brand strength internationally, is even stronger.

So, clearly, we think this there's a tremendous amount of growth to come.

I will be honest, we were surprised with the strength that we saw in the third quarter and the fourth quarter.

We didn't anticipate it snapping back as quickly as it has but it has.

So, it makes us optimistic but I'm not ready to give guidance yet.

I don't have sales plans from everyone having had detailed discussions and everyone.

And as you said, Warnaco will be a big driver of it.

Their long term growth targets and clearly, they've communicated both to the Street and to us that they believe, over the next four years, they can double the size of their business.

So, clearly, that's a huge growth opportunity for us.

As those firm up, we'll clearly share those with you.

Great, thanks for that color.

I really appreciate it.

And just a quick follow up for Allen on the dress shirt business, which is clearly a very mature business.

You're getting a lot of market share.

I'm wondering if there's some things going on within the business that are helping drive some of this growth for you?

I've heard a lot about fitted dress shirts being a fast growing category and underdeveloped at the big department store chains.

And I'm just wondering if that's behind some of what's going on in dress shirts?

Dress shirts, as a category, seems to stabilize during tough times.

It's one of those categories that's less effected.

But we are getting the benefit of a couple of trends.

One, is the core product is selling very strongly and we're able to capitalize on that.

But from a fashion perspective, while you hit it right on the head, slim fit, fitted shirts, they've taken a whole new position on the floor.

We have many brands that represent that point of view and their statement.

Calvin Klein, certainly, one of the strong brands at that part of the spectrum of price, down through Kenneth Cole.

Down even into Van Heusen, where you can get good fitted shirts at a good value.

So, yes it is a complement to the business but overall the business is good.

Some of that is trade off and some of it is incremental sales.

Great.

Thanks a lot.

Good luck in the fourth quarter of next year.

Thank you.

Now, we'll take a question from Kate McShane with Citi Investment Research.

Hi, Manny and Mike.

This is [Karina Sun] for Kate.

Can you talk a little bit about the significant increase in Calvin Klein margin this quarter and whether that was impacted by the $5 million shift in ad spend?

Yes, it was impacted by a portion of the $5 million -- 70% of the shift in the advertising spend.

Obviously -- I think that the number, it's a 1,000 basis point improvement in operating margins for the quarter.

We've always said, you can't focus on that quarter because there's always expense shifts that go back and forth.

But for the year, I think we're projecting operating margins to improve 200 to 300 basis points.

And we'll probably, given that the incremental spend in the fourth quarter and a 8%, 9% growth in royalties, our operating margins will actually probably be down somewhat in the fourth quarter.

But when you look at the full year and the second half, up pretty significantly.

But our profits, also, will be up pretty significantly, in the quarter, on a dollar basis.

So, I think it's just purely timing and the overall performance has been outstanding.

Okay great.

And then, could you also elaborate a bit more on the comp store sales for this quarter and maybe provide us with the traffic and conversion rates at your own stores?

Okay.

Sure.

Let me -- what we're seeing, from the data that we're seeing is -- I'm going to put it in some perspective.

If comp sales are up 6%, we're seeing that being driven off of flat to minus 1% traffic trends.

We are getting higher AUR's and we're getting higher conversion in the stores, across the board, in all four of our retail formats.

So, it's not being driven by increased traffic in the stores.

I do believe that the customer that is showing up at the mall, the outlet center, is a customer that's more motivated to shop than maybe in prior years.

And I think there is less strolling going on and more shopping going on.

I think that's a trend that's just going on overall.

And too, I think our least line message is pretty compelling and our value message in store is very compelling and that's helping, both our AUR's overall and are significantly helping our conversions.

Okay.

Great.

Thank you.

And now, we'll take a question from Susan Sansbury with Miller Tabak.

Thank you.

Actually, my question was answered.

I think you're doing a fabulous job and good luck on a go forward basis.

Thank you.

Operator, we'll take one more question.

It's already almost 10 after 10:00.

So, we'll take one more question.

Yes, sir.

We'll take our final question from [Elaine Te] with Bank of America.

Hi, guys.

Just wanted to follow up, really quickly, on the comp sales.

Can you just break out the comps between Calvin Klein and heritage?

I will -- sure.

Hold on one second.

Can I do that, Mike?

Yes.

For the third quarter?

The third quarter and what you're seeing in November.

Okay.

In the third quarter, our comps in our average business is up about 7% or 8%.

And our comps in Calvin are up 2% to 3%.

And we're seeing our comps in our heritage business, in the fourth quarter, up 2% to 3%.

And Calvin up 4% to 5%.

Thank you.

And Mr.

Chirico, that does conclude our question-and-answer session.

I'll go ahead and turn it back to you for any closing or additional remarks.

Okay, thank you very much.

We look forward to our fourth quarter press release.

And have a very happy, healthy holiday season and New Year.

Take care, everyone.

Ladies and gentlemen, that does conclude our conference for today.

Again, thank you for your participation.