Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Executives

Deborah Abraham - Vice President of IR

Joe Gromek - President & CEO

Larry Rutkowski - Executive Vice President & CFO

Helen McCluskey - President, Warnaco Intimate Apparel

Frank Tworecke - President, Warnaco Sportswear Group

Analysts

Jeff Klinefelter - Piper Jaffray

Chi Lee - Morgan Stanley

Eric Beder - Brean Murray, Carret & Co.

Carla Casella - JP Morgan

David Glick - Buckingham Research Group

Susan Sansbury - Miller Tabak

Evren Kopelman - JP Morgan

Warnaco Group, Inc. (WRC) Q3 2008 Earnings Call Transcript November 6, 2008 9:00 AM ET

Operator

Good morning. My name is Jackie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Warnaco Third Quarter 2008 earnings conference call. (Operator Instructions) I would now like to turn the call over to Deborah Abraham, Vice President of Investor Relations. Please go ahead ma’am.

Deborah Abraham

Thank you. Thank you for joining us. On the call with me this morning are Joe Gromek, Warnaco's President and CEO; Larry Rutkowski, our CFO; Helen McCluskey, our Group President, Intimate Apparel and Swimwear; and Frank Tworecke, our Group President, Sportswear. Joe will begin this morning with some comments on the quarter, followed by Larry, who will review the financials and update our guidance. Helen and Frank will take you through some segment highlights, and following our comments there will be an opportunity for you to ask questions.

Today's comments are based on Warnaco's adjusted results on a continuing basis, which excludes restructuring, pension expense, certain other tax items and other items, including the nonrecurring tax charge related to the repatriation of proceeds from the sale of Lejaby. The Company believes it's important for users of the Company's financial statements to be aware of the adjusted financial information related to the Company's income from continuing operations, as such measures are used by Management to evaluate the operating performance of the Company's continuing business on a comparable basis. A reconciliation of actual results to the adjusted are available in the schedules accompanying today's press release.

As we've done in the past, our group operating results will be discussed excluding the allocation of shared service expense. The allocation amounts can be found in the tables attached to our earnings results released this morning, as well as in our Q's and our K's.

Quickly before we begin, let me remind you that today's conference call may include comments regarding the Warnaco Group's business outlook and may contain forward-looking statements. Any forward-looking statements and all other statements that are made on this call that are not based on historical facts are subject to risks and uncertainties, and actual results may differ materially. Information concerning a number of the factors that could cause actual results to differ materially from the information that will be discussed is available in Warnaco's filings with the SEC including the Form 8-K furnished today.

Now let me turn the call over to Joe.

Joe Gromek

Thanks, Deborah. Good morning. This morning I will review our third-quarter results, update you on the most current trends in our business, including October comps, and share with you some actions that we will be taking to navigate through the current economic environment.

Our third-quarter results reflect the continuing success of our long-term strategies to grow our Calvin Klein businesses, expand geographically, and build our direct-to-consumer initiative. Our Calvin Klein business continued to drive our growth with a 20% increase in revenue. All geographies contributed to this growth.

Operating earnings grew modestly in dollars, up 7%, as earnings were adversely impacted by currency and a higher tax rate. On a constant-currency basis, operating earnings rose more than 28%. Our ability to achieve these results despite challenges around the globe is a testament to the power of our brands and the investment we have made to support geographic expansion in our direct-to-consumer initiatives. While we face currency headwinds from our global strategy near-term, the fundamentals of our business remain strong, and we believe we are poised to continue our expansion and gain market share in all areas.

Looking at our business. Calvin Klein delivered another strong performance. We experienced double-digit growth in Calvin Klein jeans, Calvin Klein underwear and Calvin Klein swimwear. We continue to leverage our regional and country platforms to drive our Calvin Klein businesses and our direct-to-consumer initiatives.

International revenues accounted for 57% of total revenues for the quarter, and were up solidly in all regions. Europe rose 16%, Asia was up 31% and our business in the Americas was up 43%. The diversity of our revenues across geographies, channels and customers helped mitigate softness in certain markets. We are continuing to expand in markets such as Germany, Russia and Brazil, where Calvin Klein is relatively under-penetrated. In developed markets, we are focused on maximizing under-penetrated merchandise categories and expanding new lines of business, such as accessories.

Turning to direct-to-consumer. Revenues rose 26%, including a 13% increase in comparable store sales. Preliminary comps for October were up 3%. During the quarter, we added 37 new points of distribution, and at quarter end we were operating 840 stores around the globe. To date, we have added almost 80,000 square feet of additional retail space and expect to add another 20,000 feet before year end. Looking forward, we will build on our success and invest in our retail rollout, and grow our retail footprint by 25% in 2009.

In the US, revenues were up 6%, and we continue to get our fair share of the market. Most importantly, all of our US businesses generated improved earnings in the quarter. We will continue to pursue top-line growth and market share gains in our domestic Calvin Klein businesses and operate our heritage businesses with an emphasis on profitability. Clearly, the macroeconomic environment is challenging. The apparel and retail sector experienced further deterioration as the quarter drew to a close. This trend continued into October with many retailers reporting disappointing same-store sales results this morning. Turmoil in the financial markets, declines in foreign exchange, and uncertain consumer confidence have all of us in the industry prepared for further weakness.

While we are pleased with our third-quarter performance, we believe these external conditions will have an impact on our near-term revenue growth and profitability. To respond to this weakness, we will look to manage parts of the business we can control. We will plan our business conservatively, aggressively managing inventory and align our cost structure to match today's economic conditions.

That said, we remain committed to our long-term goals to maximize revenue and profitability to generate value for our shareholders. We have a thoughtful and compelling strategic plan, a strong portfolio of brands, diversified channels of distribution, and a seasoned team to execute against that plan.

Now, let me turn the call over to Larry to review the financials.

Larry Rutkowski

Thanks, Joe. Turning to our third-quarter adjusted results. Revenues rose 16% to $549 million, including $11 million of additional goods shipped primarily to membership clubs at the customers' request.

Gross margin increased 380 basis points to 47%. SG&A, as a percent of net revenues, increased 470 basis points to 37%, due in large part to currency. Operating income was the $54 million or 10% of net revenues compared with 50 million in the prior-year quarter. Income from continuing operations increased 10% to $35 million, or $0.74 per diluted share.

For the quarter, the impact of foreign currency exchange rates increased revenue and gross profits by approximately $8 million and $2.0 million, respectively, but also increased SG&A expense by $15 million, primarily related to the mark-to-market of US dollar-denominated trade liabilities in certain of our company's foreign subsidiaries, and thereby decreasing operating income by approximately $12 million.

At the same time, we realized $3 million in other income from our hedging strategy. On an adjusted basis, for both the quarter and year-to-date, our effective tax rate was approximately 32%, and we expect that rate for the balance of the year. The increase in our tax rate reflects the mix of profits shifting geographically and the impact of foreign currency exchange rates.

Looking at the balance sheet, we ended the quarter in a strong financial position. We have substantially reduced our long-term debt, and we believe we are well positioned to fund our expansion initiatives and weather the challenges of the current macroeconomic environment. Cash and cash equivalents as of October 4, 2008 were $123 million compared to $189 million as of September 29, 2007, the decline reflecting the reduction in our long-term debt.

During the quarter, as previously announced, we closed on a new $300 million asset-based revolving credit facility. As part of that refinancing, we retired the outstanding balance of our Term B loan or $106 million of debt. Accounts receivable increased to $327 million at quarter end from $288 million last year, primarily reflecting the growth in the Sportswear and Intimate Apparel businesses.

Net inventories were $316 million at quarter end, down from $340 million last year, which includes $5 million of inventory related to discontinued operations, with the balance of the decline primarily due to currency. We are comfortable with the quality of our inventories and will continue to take a conservative approach towards planning our business and inventory in this unsettled economic environment.

As Joe commented earlier, we remain committed to our long-term goals. However, certain market conditions, particularly currency and the macroeconomic environment, are affecting our near-term results. Specifically, using today's exchange rates, we anticipate that fluctuations in foreign currency exchange rates will negatively affect fourth-quarter and full-year results.

In constant currency, fourth-quarter net revenues are expected to grow approximately 3% to 5%. However, current exchange rates are expected to negatively impact net revenues by 8 to 10 percentage points, resulting in an approximately a 5% decline in reported net revenues for the fourth quarter.

Turning to our annual guidance for 2008. Net revenues are expected to grow 12% to 14% over comparable fiscal 2007 levels. And due both the negative impact of currency and the higher tax rate, which together equate to approximately $0.30 per diluted share, we now believe that on an adjusted basis, excluding restructuring expense, certain tax and other items, and pension expense, diluted earnings per share from continuing operations will be in the range of $2.50 to $2.65. And we would note that we are currently tracking to the high end of our EPS guidance.

Now let me turn the call over to Helen to review Intimates and Swimwear.

Helen McCluskey

Thanks, Larry. Despite challenging market conditions, the Intimate Apparel Group continued to post positive results. Revenue for the quarter was up 14%, and operating income was up 3%. Operating income was negatively impacted by planned increases in investments in Calvin Klein underwear and unfavorable currency exchange rates. As in prior periods, all geographies and brands recorded revenue increases.

Revenue in our core brands was up 7%, and operating income was up 33%, achieving a 16% operating margin. Both Warner's and Olga gained market share in the quarter, which reflects increased presence in the mid-tier channel, including JC Penney distribution. The moderate (inaudible) market continues to be challenging, down 3% through September. However, both Warner's and Olga have posted positive sales gains at retail. We believe our focus on providing differentiated products has served us well to date and will enable us to continue to perform at a level above the overall market trend over the long term.

Calvin Klein underwear had a solid quarter, posting a 17% revenue increase, led by a 43% increase in Asia. Gross margin was up 250 basis points, which reflects a 23% increase in direct-to-consumer revenue and a favorable impact from the launch of Seductive Comfort.

As mentioned previously, planned incremental investment in marketing, direct-to-consumer and infrastructure in Europe, Asia and Latin America offset gains in revenue and gross margins resulting in flat operating income and an operating margin of 21% for the quarter. Operating margin is down roughly 400 basis points versus the prior-year period, which reflects the increased investment noted earlier and the unfavorable impact of foreign currency exchange rates of nearly $4 million.

At retail, our direct-owned comp store sales were up 6%. Europe was up 3%, driven by our outlet channel, and Asia was up 26%, with particular strength in China. Retail sales in US department stores were flat for the quarter. We successfully offset the volume for the launch of Steel last year, and revenue in our men's business was up 11% for the quarter. Our new Body initiatives are off to a good start, and we continue to maintain our leadership position in the market.

The women's launch of Seductive Comfort was well executed with significant advertising, in-store activity and special events. Eva Mendez hosted two personal appearance events at Harrods in London and El Corte Ingles in Madrid. Seductive Comfort is reaching a new consumer for Calvin Klein underwear, which is one of our key strategic goals. Calvin Klein underwear continues to drive sales at retail. While our rate of increase has slowed somewhat in recent weeks, we believe that the initiatives we've put in place and investments we've made will deliver growth over the long term.

The third quarter is not a significant revenue or profit-generating quarter for the Swimwear Group. Revenue was down slightly for the quarter due to a timing shift of a [club] order, which we will ship in the fourth quarter. The operating results for the quarter were comparable to the previous year, posting a loss, but as you may recall, included an incremental $3 million spend behind the Olympics. Post-Olympic excitement has continued, with increased interest in swimming and the Speedo brand. To date, our 2009 swim season bookings are up 3%.

Overall, we are satisfied with our results to date in Intimate Apparel and continue to work to improve our operating performance in Swim. While we continue to be optimistic, we are aware that recent economic events may impact our business. We believe that our brands are strong, our strategies are sound, which should enable us to continue to perform at a higher level than most over the long term. In the meantime, we will heighten our focus and attention on delivering compelling products, containing costs and achieving operational excellence.

Now let me pass the call over to Frank to comment on Sportswear.

Frank Tworecke

Thanks, Helen. The Sportswear Group's positive year-to-date sales trend continued through the third quarter. Revenues increased by 20%, gross margins improved by 250 basis points to 45%, and operating income increased by 20%, to 16% of net revenues.

Beginning with Calvin Klein jeans. Revenues grew by $49 million, to $269 million, with an operating margin of 15%. All geographies experienced double-digit revenue growth led by a 26% increase in Asia, 20% in Europe, and 10% in the United States. We are pleased with the revenue expansion, and although operating income in dollars increased, the operating margin percentage declined by 100 basis points, due primarily to $8 million of unfavorable currency valuations. Both the wholesale and retail segments contributed to our positive performance in the quarter.

Worldwide, wholesale revenues grew by 20%, experiencing above-average growth in women's jeans and accessories, and an expansion of domestic sales into the value channels of distribution. Retail sales in the third quarter increased by 30%. On a comparable basis, same-store sales were up 19%, driven by outlet store sales in Europe and freestanding stores and concession sales in Asia.

Turning to the Chaps brand. Revenues grew by 7%, in part due to the timing of deliveries into the third quarter from the fourth quarter of this year and the continuing positive demand at the mid-tier channel of distribution. Operating margin improved to 19% versus 14% a year ago, as gross margins increased by 360 basis points and SG&A declined by 160 basis points. Continued improvement of sell-throughs at retail reduced the need for markdowns and reflects the positive response by our consumer to the enhanced aesthetic of the product offering and the superior price/value position of the brand.

In response to the current economic climate, the Sportswear Group is monitoring inventory levels and future purchases to ensure they are in line with revenue expectations, while re-evaluating operating processes to improve efficiencies. As always, compelling product offerings, coupled with strong brand names and effective operating disciplines will propel our future results.

Operator, this concludes our prepared remarks. We would now like to open the floor for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Jeff Klinefelter with Piper Jaffray

Jeff Klinefelter - Piper Jaffray

Yes. Thank you. Just a couple of questions for you guys. Maybe Larry, starting with you, on the trade payables. Could you get a little bit more specific on how this is actually hitting you from an accounting perspective, how this has changed or how going forward you might be able to hedge this differently?

Larry Rutkowski

Sure. Basically the $15 million unfavorable foreign exchange to SG&A in the quarter was driven primarily by mark-to-market of the balance sheet at the end of the periods, both the end of August and September. And as we mark-to-market those at the declining exchange rate, we had to take the charge, primarily to our trade liabilities in our Company notes. So that's -- that was the impact. Most of those, now, we have been monitoring closely we are making sure that we are using foreign -- local currency to pay down those as much as possible and mitigate the exchange-rate impact for the foreseeable future.

Jeff Klinefelter - Piper Jaffray

So you would anticipate with the new strategy, that the volatility of that line item would be more controlled in the future periods?

Larry Rutkowski

Yes, Jeff, that's correct.

Jeff Klinefelter - Piper Jaffray

Okay. Mix -- your tax rate, mix of profits geographically, could you just help just clarify that and remind us again kind of your major geographic -- global geographic regions, how your tax rates are different today and how these currency fluctuations are changing that?

Larry Rutkowski

Sure. Absolutely. In terms of what drove our tax rate up from 29% to 31.5% in the quarter, and therefore what we are using for this year in the balance, is the fact the mix of our profits by geography has changed. Much of this has been impacted by foreign currency impacting and reducing those reported profits back here, but also geographic mix.

Jeff, as you know, our effective tax rate in the US is approximately 40%, where internationally our blended rate is closer to 20%. The fact is that seeing more of our profit percentage in US dollars raises that tax rate, and similarly, in other countries and geographies like Italy we are showing some profits at effectively a 28% tax rate.

Jeff Klinefelter - Piper Jaffray

Okay. Two other queries just quickly. Your retail operations showing op margin declines year-over-year. Just remind me, is this part of the investment spending in that division or what else is impacting those op margins, retail op margins?

Larry Rutkowski

Jeff, that's a combination of both the investment spend that we had indicated we would be doing, plus they are being impacted by foreign currency as well.

Joe Gromek

Jeff, remember we are operating 840 points of distribution around the globe. One of them is in the United States. So clearly, currency is having a major impact.

Jeff Klinefelter - Piper Jaffray

Okay. And Joe, on that topic, you are maintaining your growth rates, your square footage growth rates going forward would suggest that outside of currencies, you are still not seeing any alarming deterioration in performance in those markets, specifically Asia. And can you put that in perspective with what we're seeing in terms of headlines in those markets?

Joe Gromek

Sure. I think that we commented -- if we look back into the second quarter release, I think our comp stores were in the high double-digit numbers, somewhere in almost 20%. And we just finished the third quarter at 13%, and now for October we just reported 3%. We're being impacted around the globe, but in this environment, 3% is pretty good I think we stand tall with that kind of a number. As we are looking at retail space and new opportunities, our objective is a 20% four-wall profit before we sign up for a new door, and basically, we believe that we are still able to accomplish this, hence the continuation of the strategy. We believe we will gain market share in this very difficult moment.

Jeff Klinefelter - Piper Jaffray

Joe, are you seeing any changes in real estate deals in -- specifically in the Asian markets, given what's happening to their economy?

Joe Gromek

Yes. We are hearing about it, Jeff. And as we continue to -- those leases come due every three years on existing doors. So, we believe there is an opportunity moving forward as our leases become renewable that we might be able to get reduced rates based on -- in a new world economy. Having said all that, our comps in Asia have been pretty good so far. So on a local currency basis, we are holding, we are standing tall.

Operator

Your next question comes from the line of Chi Lee with Morgan Stanley.

Chi Lee - Morgan Stanley

Hey, guys, good morning. Larry, do you mind breaking out the $0.30 FX and tax impact? Can you just break out what your view of the two different buckets are?

Larry Rutkowski

Sure. Just in broad strokes. The fourth quarter we are being impacted by currency to a tune of about $0.20 per share. The -- in terms of the tax rate, that is the effect on the full-year results going from 29% to 31.5%, which cost us about $0.10.

Chi Lee - Morgan Stanley

31.5%. Okay, great. And then, the October comp growth that you talked about, Joe, plus 3%. Is that on a local currency basis? And if so, can you just talk about regionally where you are seeing greater rates of deceleration?

Larry Rutkowski

Constant dollars.

Joe Gromek

Yes, that is in constant dollars. And I think we are seeing a slowdown in Western Europe. When we looked at it, Spain has slowed down fairly dramatically at this point. The Italian market is struggling a bit right now. We are still holding on our own in the UK. So, some of the areas where we had good strength in Western Europe, we are feeling a bit of the pain. In terms of our businesses in Asia -- for the month of October, they were still pretty powerful. I think we do have a number for October -- Asia was plus 20 comp, so -- I am sorry -- plus 2 comp, so we are holding our own there.

Chi Lee - Morgan Stanley

Okay. Thank you.

Operator

The next question comes from the line of Eric Beder with Brean Murray.

Eric Beder - Brean Murray, Carret & Co.

Good morning.

Joe Gromek

Good morning.

Eric Beder - Brean Murray, Carret & Co.

Could you talk a little bit about the domestic policy? Are you seeing any push-backs in orders, canceling orders from the domestic area here?

Joe Gromek

To date what we have seen is that there has been a bit of a falloff in replenishment. So, in the businesses where we sell one, we ship one, that has slowed down a bit. But in terms of basic ordering moving forward, currently and moving forward, we still look pretty strong.

Eric Beder - Brean Murray, Carret & Co.

Okay. You talked about that you were at the high end -- you were trending towards the high end of your guidance for Q4. When does the vast majority of your shipping for the holiday season pretty much end? So how close are we -- how much more are you in the cycle here?

Joe Gromek

Well, remember that we are a wholesaler and a retailer. So we have got a couple of components here. During the quarter, we have a significant amount of retail business to be done, and the fourth quarter is the largest -- it's probably the largest percentage-wise portion of retail that we do. So the mix is probably $100 million of retail, and the balance would be wholesale. We are in a fairly good shape. I think we are probably 80%, 85% booked and ready for the balance, which would be replenishment. So, if the replenishment holds, we are in great shape.

Eric Beder - Brean Murray, Carret & Co.

Okay. Any thoughts on potentially doing share repurchases at these levels?

Joe Gromek

I think we continue to evaluate the utilization of our cash, and right now, we think it's prudent to be in a strong cash position. But, certainly we will look at both share repurchases and the reduction of our long-term debt.

Eric Beder - Brean Murray, Carret & Co.

Okay. Thank you.

Operator

Your next question comes from the line of Carla Casella with JP Morgan.

Carla Casella - JP Morgan

Hi. I am wondering if you can talk a bit about on your receivables side, are you concerned about any of your customers? Have you changed any of your terms with them or have you seen any difference in the dating of your receivables?

Larry Rutkowski

Carla, in terms of our receivables, obviously in this environment we are seeing some slower collecting. We are putting all efforts to monitor and manage that collection tightly. We are holding our vendors to the terms we have agreed to. And, but in terms of risk, one thing I want to point out is that we did take a credit insurance policy against many of our retailers a year ago, so we were protected from some of the announcements we saw in the third quarter. For most of our retailers, we were able to renew a credit -- bad-debt reserve -- insurance continuing for the next year.

Joe Gromek

Carla, we do have that globally, as well. So we are insured against receivables in Europe and parts of Asia, not just domestically. And the other thing that we are doing is that Larry is being very vigilant, and as someone becomes a little past due on their bills, we evaluate the shipping at that moment in time. So typically that gets everyone's attention, and it has kept us fairly current.

Carla Casella - JP Morgan

Okay. Great. And then on the pension side, can -- how much are you contributing into the pension in '08? And do you have any early estimate of how much that could potentially increase in '09 just given the under-funded position?

Larry Rutkowski

Well, Carla, as you know, in the terms of the pension, we true it up in the fourth quarter. Obviously in this environment I think as most people, the pension assets have been under performing. So, we anticipate that we will be funding a little more.

We've been typically funding $10 million to $20 million a year, and that was what was -- and we are close. And if the pension would have performed as expected this year, we would've been close to being fully funded. So, we will evaluate them in the fourth quarter. Also, please look forward to the Q. We do disclose where the assets are at the end of third quarter as an estimate.

Carla Casella - JP Morgan

Okay. Great. And then one last question on the wholesale side, do you still have, I mean, during fourth quarter will -- are you still adding any new doors or adding space in existing doors? Or are we looking at -- should we be looking at this as a sell-through of existing doors?

Joe Gromek

Let's put the scale of the business in perspective. Our department store business currently represents about 15% pf total Warnaco. In Q4, it's probably a little less than that based on the fact that our own retail sales are heightened. And we do have around 10% in the -- with the chain stores. So, that's the magnitude of what the situation is. And yes, we do have expansion of fixtures in certain doors and particularly in the Intimate Apparel area. So, there is additional space, additional doors, and additional fixturing.

Carla Casella - JP Morgan

Okay. And that would be both domestic and international?

Joe Gromek

That's primarily domestic that we are talking about. And I think if you look at the Chaps brand as well, in the mid-tier, we have expansion of doors there also based on certain -- some of our clients having added doors.

Carla Casella - JP Morgan

Okay. Great. Thanks.

Operator

(Operator Instructions) Your next question comes from the line of David Glick with Buckingham.

David Glick - Buckingham Research Group

Joe, as we have thought about your company coming into this year in terms of revenue growth, we generally thought of kind of the US as flattish and international 20% plus. Obviously, you've outperformed that through the third quarter and then clearly the world economy has changed. So now we are going from high-teens -- constant currency growth down to 3% to 5% in the fourth quarter, which sounds like you are trending towards the high end. Can you help us think about how the dynamics have changed, US versus Europe and Asia, in the context of that revenue guidance? And then, the growth rate of Calvin Klein versus your other businesses as well? So, we can kind of recalibrate on how we think about the revenue growth going forward.

Joe Gromek

David, I think the domestic business has been a pleasant surprise, and that's purely based on the ability of our teams to execute. We have had very strong performances in the core Intimate Apparel business. We have had very strong business to date with our Chaps brand. So they are really the drivers of the growth here. Remember, going into the year we said that this would be a profit story, not a revenue story. And in fact, we are seeing both. So that was a very pleasant surprise.

I think moving forward, you think about the Calvin Klein business. Last year, we grew by 4%, year-to-date we are up 20%. That was well above the projections that we had given to you, which was in the 12% to 15% range. So, we clearly have over achieved in that area, and a lot of that is based on the fact that we are growing our retail footprint. We will continue to grow that retail footprint, and we think we will continue to gain market share globally.

We see the opportunity in Asia specifically, where we will grow more rapidly. I think if anything, we will drag our feet a bit in Europe, where we have had good success with factory outlet stores, but we are starting to run out of room to open those up.

David Glick - Buckingham Research Group

Okay. So, and again, in the context of 3% to 5%, how would you position Calvin versus that overall growth rate for the fourth quarter?

Joe Gromek

I think the Calvin would continue to excel and be in the high end.

David Glick - Buckingham Research Group

High end or above?

Joe Gromek

It will outperform the balance.

David Glick - Buckingham Research Group

Okay. And then -- so in the US you think you can still run positively?

Joe Gromek

I think the US, based on some timing of shipments, I think we actually over delivered a bit, and I think as you saw in Larry's announcement, I think we were like a -- $11 million or $13 million over-delivered in the third quarter. So I think we will feel some of that pain in the fourth quarter.

Carla Casella - JP Morgan

Okay.

Larry Rutkowski

David, just to put it in perspective, the year-to-date growth of 20% overall for the Company in terms of revenue growth for the nine months, we delivered over 5% -- 5.4% in the US; Europe was 33%; Asia was 37%; and then Canada, 19%; with Mexico/Latin America at 70%.

David Glick - Buckingham Research Group

Right. So that's what I am trying to recalibrate, Larry. So, is it fair to think of the US as kind of flattish, Asia with the highest growth rate, and maybe Europe around the average?

Larry Rutkowski

That's probably in the range, yes.

David Glick - Buckingham Research Group

Okay. And then CK, obviously maybe in the high single-digit range; is that fair?

Larry Rutkowski

Outperforming the 5%.

David Glick - Buckingham Research Group

Okay. Very good. Thank you very much.

Operator

Your next question comes from the line of Susan Sansbury with Miller Tabak.

Susan Sansbury - Miller Tabak

Okay. Hi. Thanks. Just pursuing David's line of questioning a little bit, and then reference to your comments about what was going on in Europe in the third quarter with Spain and Italy, I think you said -- was Spain was challenging and Italy had slowed down a lot.

Joe Gromek

Susan, I would say that, that’s more fourth quarter -- October than third quarter, candidly.

Susan Sansbury - Miller Tabak

Oh. Well, and -- again, okay. With respect to David's line of questioning, though, is anything down in -- by country in Europe and/or by category?

Joe Gromek

Typically we are not down, because we have expanded square footage. So we still run positive. But on a comp basis, I think we have seen some deterioration in certain markets.

Susan Sansbury - Miller Tabak

Okay. But generally it should be positive?

Joe Gromek

That's correct.

Susan Sansbury - Miller Tabak

Okay. And Larry, can you be a little bit more specific about the fourth-quarter increment-to-pension expense at this point?

Larry Rutkowski

At this point, like I said, the biggest thing is that we're getting impacted unfavorably to EPS by approximately $0.20 per share just because of what's happened with currencies. And as I called out, the other $0.10 is the annual effect of a tax rate -- oh, pension. I am sorry.

Susan Sansbury - Miller Tabak

Pension. The question related to what the hit is actually going to be on pension.

Larry Rutkowski

Sure. Based upon the assets' performance and where we expected them to be, there is about a $20 million or $23 million -- $24 million under-performance from where they were. What we will do, Susan, is in the fourth quarter we go through the actuaries and actually true up that discount rates and several other variables, and we do that every year and mark-to-market that through our P&L, as you know.

Susan Sansbury - Miller Tabak

I am sorry. Start again. Year-to-date you under funded by $20 million to $24 million, so you have to true that up in the fourth quarter?

Larry Rutkowski

No, we don't. To be clear, the performance of our assets would result in terms of the assets performance, would be down approximately $24 million. You don't have to fund that immediately, and so that's just the reality of what overall funds have performed in 2008.

Susan Sansbury - Miller Tabak

Okay. So the answer is, there is no answer at this point. Okay. Can you -- with respect to the US business, 2009, have you completed your Springs bookings? And if so, can you give us an idea of the magnitude of change, and differentiate between Calvin Klein and all other businesses?

Joe Gromek

Okay. We are in market as we speak, and to date, again, we are feeling confident. There is a mix implication of the customers that we are selling. The department stores are at one place, and some of the secondary channels are picking up some of the steam. So, at this point (inaudible) we are fairly comfortable with our forward bookings. If you want to hear more by brand, the group presidents can you take you through their businesses, if you would like.

Susan Sansbury - Miller Tabak

Sure.

Frank Tworecke

Okay. This is Frank. How are you?

Susan Sansbury - Miller Tabak

Thank you, Frank.

Frank Tworecke

In our Calvin Klein business -- now here again, channel shipments are important in how we are flowing product. In the department store segment, we are looking for the quarter somewhat flattish, up a little bit; but enormous increases as it relates to our spring, flat-to-up; and we are looking at significant increase in our value channels of distribution. In the Chaps business we are (inaudible) we have very strong bookings coming into the (inaudible) short span on a comparable basis.

Joe Gromek

So Susan, to answer your question, Sportswear bookings are up for the spring season.

Helen McCluskey

On Calvin Klein underwear, we are up substantially for the spring season, up 30%, the bulk of that being in the off-price channel, where we have secured ongoing programs there. On the new and fashion front in terms of what we would call our introduction volume, we are flat, but just keep in mind the bulk of our business in department store is replenishment.

On the core Warner's and Olga business, Warner's is up 5% and Olga is down slightly. And again, nearly 80% of the business in spring is replenishment, so the bookings that we have secured, we are pleased with. We have had good reaction in market. We have had good appointments this week with our retailers, who are actually looking to increase some of the items that we have right now that are really performing. So, we are in good shape going into spring.

Joe Gromek

Susan, I think that also Helen mentioned that Speedo is up 3%, I believe in forward booking. So all in all, I think we are in pretty good shape.

Susan Sansbury - Miller Tabak

Okay. Just two more questions. Helen, specifically, I know you sold in Seductive Comfort well. Any commentary about sell-through or reaction on the floor?

Helen McCluskey

Select Comfort -- right now, we are satisfied with the results, and the retailers are satisfied with the results. So we are selling through, depending on the retailer, anywhere from 3% a week to 8% a week. So the response has been good. It's certainly going into a market that's not particularly robust right now, but I think it helps drive some overall department sales in the month of October. So, so far everyone is satisfied with the results.

Susan Sansbury - Miller Tabak

Okay. What about international?

Helen McCluskey

Selling has been very strong internationally, and we have increased our penetration in some of the larger cup sizes, which was a real key initiative for us, so it's been very good.

Susan Sansbury - Miller Tabak

Stronger Asia than Europe? Is that the conclusion?

Helen McCluskey

Definitely stronger in Europe. The large cup size initiative is not a key part of the Asian business.

Operator

Your next question comes from the line of Evren Kopelman with JP Morgan.

Evren Kopelman - JP Morgan

Good morning. Thanks. I just had a few questions on the foreign currency translation impact. So firstly, in the fourth quarter when you talk about the 8% to 10% negative impact, is that purely translation? There's no mark-to-market adjustments or anything like that in there?

Larry Rutkowski

The revenue adjustment is virtually all translation.

Evren Kopelman - JP Morgan

Okay. And then can you tell us which Asian currencies that you have the largest exposures to?

Larry Rutkowski

The largest exposure is that we happen to do over $200 million -- roughly $200 million of business in Korea. So, in Asia it would be the Korean won.

Evren Kopelman - JP Morgan

Okay. That helped. And then, looking at next year, if the currencies stay around current levels against the US dollars, should we expect a similar impact?

Larry Rutkowski

Well, the -- in terms of the mark-to-market, once you mark-to-market, you shouldn't expect that to continue to flow through. In terms of translation, next year we would anticipate some negative impact. But as you know, most currencies had improved against the dollar by year end, 2007. And so as that comparison falls off in a dramatic decline we have seen in currencies in the last 30 days, there will be some negative impact that we anticipate carrying through 2009.

Evren Kopelman - JP Morgan

Okay. That helped. And then the last question on the currency is, the impact -- is it typically larger on your top line than your bottom line? Or is it the other way around?

Larry Rutkowski

Typically, the impact of currencies are much larger to the top line, and it flows through.

Evren Kopelman - JP Morgan

Okay. That helped. And then finally, on the Intimates business, based on your experience in slowing economic periods, is Intimates usually a business that holds up better than the average apparel, or really there is -- you can't say that?

Helen McCluskey

In general, Intimates -- I hate to use the expression recession-proof, but it tends to not have the peaks and valleys that Sportswear does. So, we don't enjoy as much on the upside, and we don't suffer as much on the downside. It's pretty consistent.

Joe Gromek

I think the important factor is what Helen indicated in terms of how she is outperforming the market at this moment. And the market's down, and she's up.

Evren Kopelman - JP Morgan

That makes senses. Great. Thank you, guys.

Joe Gromek

Thank you.

Operator

Your next question is a follow-up from Carla Casella with JP Morgan.

Carla Casella - JP Morgan

(inaudible) before, but in your new credit agreement, are you permitted to buy back bonds?

Larry Rutkowski

We are permitted to use -- there are covenants and restrictions in there. Primarily, in the new credit facility, if we were to trip a fixed-charge ratio, which is set at 1.1, well below where we currently are, there are restrictions. However, we are able to use pretty liberally and the credit facility for general purposes, including potentially to pay down debt.

Carla Casella - JP Morgan

Okay. Thank you.

Operator

Your next question comes from the line of Susan Sansbury with Miller Tabak.

Susan Sansbury - Miller Tabak

Hi. Larry, another foreign exchange question. Can you share with us right now what your assumptions are in terms of your hedging operations for the Euro, and I guess for the Korean -- pardon me -- whatever it is?

Larry Rutkowski

The Korean Won.

Susan Sansbury - Miller Tabak

Okay.

Larry Rutkowski

Yes. In terms of our hedging, as you know, in the third quarter we picked up over $3 million of benefit, but unfortunately [hedged] other income. Those are the FX forward contracts that we've taken. Traditionally we have taken those on approximately 50% of our anticipated Euro purchases. So, it's really been primarily protecting the European Euro-based gross margin. So -- and we have now extended that where we are looking for vendors to provide goods based in that local currency for the local markets that should help mitigate some of the gross margin transactional type fluctuations in the future.

Susan Sansbury - Miller Tabak

Okay. And you said that once you mark the balance sheet to market, you don't expect -- I don't think you mean you don't expect further mark-to-market -- negative mark-to-market, or were you saying that it would just be smaller than what you have marked-to-market so far?

Larry Rutkowski

Susan, to be clear, once you mark it to market, if the rates hold, you wouldn't have to typically mark-to-market unless the volumes or levels change. So, unless there are significant swings in the volatility rate or further declines in those currencies against the dollar, it is as big of an impact.

Susan Sansbury - Miller Tabak

Okay. All right. Just trying to -- the question was point of information. Alright. Great. Thanks ever so much.

Larry Rutkowski

Sure.

Operator

At this time, we have no further questions. Are there any closing remarks?

Joe Gromek

Thank you for joining us today. We look forward to updating you at year end with the full-year results. Have a great day.

Operator

Thank you. This concludes today's conference call. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Warnaco Group, Inc. Q3 2008 Earnings Call Transcript
This Transcript
All Transcripts