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

Phillips-Van Heusen Corporation (NYSE:PVH)

F2Q09 Earnings Call

August 20, 2009 9:00 am ET

Executives

Emanuel Chirico - Chief Executive Officer

Michael A. Shaffer - Chief Financial Officer

Analysts

Benjamin Rowbotham - Goldman Sachs

Kate McShane – Citi Investment Research

Robert Drbul - Barclays Capital

Jeff Mintz - Wedbush Morgan Securities Inc.

Evren Kopelman - J.P. Morgan

Paula Torch – Needham and Company

Omar Saad – Credit Suisse

Jeffrey Klinefelter - Piper Jaffray

Andrew Byrd - Post Advisory Group

David J. Glick - Buckingham Research Group

Chi Lee - Morgan Stanley

Operator

Good day ladies and gentlemen and welcome to the Phillips-Van Heusen second quarter 2009 earnings conference call. This webcast and conference call is being recorded on behalf of PVH and consists of copyrighted material. It may not be recorded, reproduced, retransmitted, rebroadcast, downloaded, or otherwise used without PVH’s express written permission. Your participation in the question and answer session consists of your consent to having any comments or statements you make appear on any transcripts or broadcast of this call. The information made available on this webcast and conference call contains certain forward-looking statements which reflect PVH’s view of future events and financial performance as of August 19, 2009.

Any such forward-looking statements are subject to risks and uncertainties indicated from time to time in the company’s SEC filings. Therefore the company’s future results of operations could differ materially from historical results or current expectations as more fully discussed in its SEC filings.

The company does not undertake any obligation to update publicly any forward-looking statements, including without limitation, any estimate regarding revenues or earnings. The information made available also contains certain non-GAAP financial measures as defined under SEC rules. A reconciliation of these measures is indicated 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 I would like to turn the call over to Emanuel Chirico, Chief Executive Officer for Phillips Van Heusen.

Emanuel Chirico

Mike is going to quantify the financial results for the second quarter after my comments and then I’m going to come back and try to put some color and perspective onto our projections for the balance of the year.

Let me start with a business roundup. I’ll start with Calvin Klein licensing. Overall our royalty revenues in the quarter were down about 6% and on a constant currency basis, declined only 3%. Operating margins improved significantly by 220 basis points to over 60%. Looking at our largest licensing category is Warnaco Jeans, and underwear royalties were down about 10% for the quarter. On a constant currency basis, Warnaco sales were down about 4% for the quarter.

The US jeans and underwear businesses were down about 15% due to sale timing shifts and the overall challenging retail environment. The international jeans and underwear businesses were ahead about 8% overall.

Warnaco’s international comp store performance increased about 1% in the quarter and they have increased their estimate for new store retail square footage about 20% to just over 120,000 square feet for 2009. As Warnaco talked about on their second quarter earnings release call just a couple of weeks ago, their business in the second quarter was significantly impacted by a number of revenue timing shifts which accelerated revenues into the first quarter and out of the second quarter. Therefore, I think it’s probably more meaningful to look at the Warnaco business in a total six month basis.

For the six month period and first half of the year, Warnaco’s royalty revenues on a constant currency basis were up 3% so on all points they’ve had a strong performance. For the second half of the year we and Warnaco are projecting flat royalties on a constant currency basis for the jeans and underwear business worldwide. We believe we have opportunity to outperform against that but right now we think it’s very reasonably planned.

Moving to fragrance, our fragrance business is by far our most challenged category in the Calvin Klein portfolio. Total fragrance royalties in the second quarter were down about 25%. Again, just to remind you, the two primary channels of distributions for this product are high end US department stores and travel retail, particularly duty free airport shops. Both of these channels of distribution are under a significant amount of pressure and it’s impacting the overall business. As we look at market share for fragrance, we have not lost any market share position in the total fragrance business both domestically and internationally. Our brands, particularly Euphoria, Eternity, some of our large franchises, the CK franchise, continues to perform on a relative basis against the competition very well.

In the US, our licensing partner G3 is continuing to post strong sales in the men’s and women’s outerwear category as well as strong growth in women’s dresses. Both of these categories ran ahead about 20% on a sales basis and total G3 royalty revenues for the second quarter were up in excess of 20%.

Our men’s and women’s footwear licensee [Jemlar] recorded sales growth of over 30% in the quarter as we benefited from a continuation of the [door road] as well as comp store growth throughout the second quarter. We are growing both internationally and domestically in the footwear category and we look for this to be an opportunity for us as we go forward.

The balance of our licensees in all product categories posted royalty growth of about 4% in the quarter, driven by strong performance both in the US and internationally. A number of the categories here are classification categories and those like men’s suits and watches and the jewelry area where Calvin clearly delivers value across and there we had strong growth in the quarter of about 4%.

Moving onto our combined wholesale and retail businesses, sales and earnings significantly exceeded our expectations. Overall sales for the quarter were flat and all businesses exceeded our sales plans. Our dress shirt and neckwear businesses continue to post strong sales performance, recording a 2% sales increase for the quarter. We continue to gain market share at all our major wholesale accounts. Our market share percentages in the United States are up about 600 basis points from this time last year and we look for stronger market share growth in the second half of the year into spring 2010 as we take on some new categories and we believe we’ll be replacing some key competitors and some doors as we go forward.

Our wholesale sportswear business had a very strong performance and here we saw a dramatic shift in the business and saw a significant improvement from the trends in the first quarter. Sales were down only 2% in the quarter, beating all of our plans. Our strong performance was really driven by our more moderately priced national brands Izod, Van Heusen, Arrow, and Timberland. They all significantly outperformed their sales and margin plans at retail. Izod had very strong performance throughout the department store sector, particularly at Macy’s and is growing its market share and presentation at Macy’s and at a number of other department stores including Belk’s.

Our outerwear performance at Kohl’s continues to be stellar. We had strong performance in that category with Kohl’s and we’re looking for market share growth there as we go into spring 2010. Our Van Heusen business posted very strong performance at JC Penney’s and Macy’s and we’re looking for a roll out particularly at Macy’s in the second half of this year into spring of 2010 with the door roll out in sports wear that will be significant as we go forward.

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

Moving onto retail, in our own retail stores, our comp store performance for the quarter was minus 3%. That was a significant improvement from the first quarter’s comp of minus 8% and we have seen a steady improvement in our comp store trends throughout the second quarter into and into the third quarter. In July we posted a 1% comp store increase for the month and this improvement of 1% has continued into the first two weeks of August.

I’m now going to turn the call over to Mike Shaffer, our CFO, who will quantify some of these results in greater detail, particularly our guidance, and then I’d like to come back before we open it up for Q&A to put some color on our guidance for the balance of the year as we go forward. With that I’m going to turn it over to Mike.

Michael A. Shaffer

Thanks, Manny. My comments include no-GAAP results which are reconciled in our press release. We had a very strong quarter, particularly in light of the difficult economic climate. Our revenues for the quarter decreased 1% to the prior year of approximately $529 million. Our wholesale and retail businesses had a strong quarter with revenues basically flat to last year. Comp sales for our outlet stores was minus 3% and was favorable to our previous guidance of minus 7% to minus 9%. Our Calvin Klein royalty revenues for the quarter were down $3.2 million with 6% to the prior year which includes a $1.6 million negative impact from the stronger US dollar.

On a constant exchange rate basis, Calvin Klein royalty revenue decreased $1.2 million or 3% as a result of shortfalls in Coty and Warnaco. Our gross margin for our wholesale and retail businesses was down 90 basis points to the prior year reflecting a combination of a promotional environment partially offset by lean inventories in the channels we operate.

Our total operating expenses for the second quarter were down $6 million or 80 basis points. We had expense leverage in both the wholesale and retail businesses as well as the Calvin Klein licensing business. Our expense improvements reflect the benefit of our restructuring initiatives as well as lower collections of Calvin Klein advertising revenues and in turn lower advertising expenses resulting from less discretionary spending from our licensees. As a reminder, advertising revenues for Calvin Klein are shown as both revenue and a like amount of SG&A. They have no effect on our EBIT line.

Earnings per share for the quarter was $0.60, significantly ahead of our consensus estimate and our previous guidance. Our operating margins for the quarter were 10.9%, a decrease of 90 basis points to the prior year. Our wholesale and retail businesses registered a decline of 60 basis points primarily as a result of gross margin which I previously discussed.

Our Calvin Klein licensing business posted operating margins of 61.7%, 220 basis points higher than the prior year. The Calvin Klein operating margin improvement was a result of less advertising revenue which I previously discussed as well as restructuring initiatives.

As we look forward, our strong second quarter performance allows us to raise our earnings per share guidance for the year to $2.30 to $2.40. Our previous guidance was $2.05 to $2.30.

Our revenues for the year are predicted to be $2.32 billion to $2.34 billion, a decrease of approximately 2% to 3% to the prior year and an improvement from our previous guidance which was down 3% to 4%. Our wholesale and retail businesses are planned to decline approximately 2% to 3% with our retail comp stores planned at minus 3% to minus 4%.

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

Total Calvin Klein licensing revenues are planned to be down approximately 2% to 4% in licensing due to less advertising revenues as a result of less discretionary spending this year by our licensees. Operating margins for the Calvin Klein licensing are projected to be up approximately 250 basis points from the prior year.

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

For the third quarter, our earnings per share is estimated to be $0.80 to $0.85. Overall, our second half wholesale and retail businesses are planned relatively flat to the prior year. However, our wholesale business assumes certain revenue shifts from the third quarter into the fourth quarter due to the aggressive inventory liquidation actions taken in last year’s third quarter and our wholesale customers wanting to receive holiday goods closer to selling.

Total revenues for the third quarter are planned down 5% to 6% to the prior year. Our wholesale and retail businesses are estimated to be down 6% to 8% with retail comps down 2% to 3% to the prior year.

Our wholesale and retail expenses for the third quarter are estimated to be relatively flat in dollars. Calvin Klein royalties for the third quarter are planned to increase 1% to 2% from the prior year. We expect minimal currency impact in the third quarter.

With that, we’ll turn it back to Manny.

Emanuel Chirico

The last piece I’d like to do is just to put some color onto our projections for the balance of the year. We built our projections to be prudently conservative given the uncertainty in the world; however, given our current sales strength and margin opportunities, we believe that they are projections that we can outperform again given the current business trends.

Let me move to Calvin Klein first. We are projecting royalties for the second half of the year to be flat on a constant currency basis. Given the fact that for the first six months of the year actual Calvin Klein royalties on a constant currency basis are up 2%, we believe we can outperform our projections if the current tone of business continues.

This is particularly true considering that beginning in September and October of last year the sale comparisons become much easier as we move into the fourth quarter of the year. We have a number of initiatives planned for Calvin Klein in the second half of the year. We spoke about these before but clearly our Body Jeans campaign and new products that are hitting the stores as we speak has been well received by the retailers. The marketing campaigns featuring Eva Mendes and Jamie Dornan is very sexually charged. It’s right in line with the Calvin Klein brand DNA and we believe it has been and will continue to be well received by the consumer.

Our Calvin Klein underwear has a number of initiatives going on, marketing campaigns that also features Eva Mendes and Jamie Dornan but we’re also focusing on updated Perfectly Fit program on the bra foundation business. We believe this is key to continue to grow Calvin Klein. We are encouraged by the early selling results of Perfectly Fit. We’ve added a significant amount of in-store activity for the second half of the year and we are optimistic that the strong performance that we’re seeing internationally will continue and that this will charge the domestic business as we go forward.

In the fragrance area, Coty will globally launch a new men’s fragrance under the CK franchise called CK Free. It will be supported by a large media spend. Shipping really begins end of August into September. The marketing campaign will launch Labor Day weekend. The fragrance is targeted to a younger male customer. They’ll be a big internet sampling and other media spend surrounding the launch of the fragrance.

Additionally, in the fall, Coty has made the decision to put marketing dollars behind a proven winner which is Euphoria’s men’s and women’s franchise. It will be re-launched with new packaging. Euphoria is the largest franchise in the Calvin Klein portfolio and it was also the largest franchise in the Coty portfolio. But clearly they’re putting their marketing dollars behind that and we believe that should support stronger growth in what we’ve seen in our business here.

Moving to our combined wholesale and retail businesses, we have built those projections in a similar manner. We believe we have an opportunity to outperform our sales estimates and our gross margin guidance as we go forward. Retail is projecting comp store sales at about the minus 2% rate for the second half of the year.

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

From a gross margin projections perspective, we have two significant opportunities which have not been quantified into our projections. We anticipate second half sourcing product cost savings of about 2% to 4% which are not fully shown in our numbers and we believe they are there to deliver better margins than what’s projected at this point in time.

Given our extremely clean inventory position, both on our balance sheet and in the pipeline at retail, we believe that we should continue to see our markdown and vendor allowance estimates as both wholesale and retail, particularly in the fourth quarter, and to put that into perspective, in last year’s fourth quarter, margin rates were down over 400 basis points.

We have assumed in our guidance that we will only recapture 50% of this decline in the fourth quarter of this year so clearly there’s an opportunity to outperform on the margin side. We think we’ve being overall on our projections prudent but we also want to recognize the fact that we have a clear opportunity to overdeliver against our estimate.

With that I’d like to open it up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Benjamin Rowbotham - Goldman Sachs.

Benjamin Rowbotham - Goldman Sachs

My question really is centered on the same store sales trends. I know last quarter you talked about volatility in traffic. Has that smoothed out? Also, was the sequential improvement more traffic driven or ticket driven in up to date?

Emanuel Chirico

We’ve seen the comp store trends really solidify and stabilize. We’ve seen improvement month by month as the second quarter improves. Our comps in May were minus 5, our comps in June were minus 4, and then we moved to plus 1 in July and that trend continued into the first 2.5 weeks of August. So clearly it’s been much more stable. It’s been much more consistent, and obviously the last six weeks have been much more positive.

From a traffic point of view, traffic has improved somewhat but our conversion rates and our average unit retail at the door have also improved. So although the traffic trends are better, they’re not dramatically better from what they have been. We’re clearly outperforming the market and the environment that we’re in.

Michael A. Shaffer

Then as we look at the SG&A performance in the current quarter, I think that came in a bit ahead of plan. What exactly could that be attributed to? Were the cost savings being pulled forward?

Benjamin Rowbotham - Goldman Sachs

Michael A. Shaffer

It was a combination of a couple different things. We did experience some cost savings above our plan. We are actually ahead of ourselves in terms of our restructuring initiatives. We’ve executed on restructuring plans. In addition to that, we did have savings on the advertising which I mentioned in my commentary. We did collect some lesser revenues in advertising from the prior year which equates to less advertising expense.

Benjamin Rowbotham - Goldman Sachs

As you look to the back half and you look at the guidance, are you strategically more intent on taking market share or margin? Put differently, where is more upside probably lying?

Michael A. Shaffer

I think there’s opportunity on both areas. Just the way we built the margin plan and the estimate, there’s opportunity against our estimates which I think is pretty significant. I don’t want to lead anyone to believe, it’s still very promotional out there. What’s not happening is there’s not a lot of clearance merchandise to move and that’s the biggest cross when it comes to markdowns. But we are being aggressive on our opening price. When goods hit the floor, we’re hitting them early to keep the consumer engaged. We believe we really need to incentivize the consumer to drive sales, so we are coming out of the box very sharp on pricing and we think that’s gaining dividends for us from a market share point of view and it’s also keeping our inventories very clean and based on the way we built the plan, we clearly have margin opportunities in the third quarter but even more so on the fourth quarter.

Operator

Your next question comes from Kate McShane – Citi Investment Research.

Kate McShane – Citi Investment Research

You mentioned in your comments that you gained over 600 basis points of share in the first half of the year. How would you categorize the share gains? Are they coming from smaller or larger brands? In what categories?

Emanuel Chirico

It’s neckwear and when I talked about the gains, I was talking about the market share gain specifically in dress furnishings that’s happening both in neckwear and dress shirts. We have come in a couple of ways. We’ve added some new brands, DKNY, Joe by Joe Abboud. We’ve also added going forward the Tommy Hilfiger business, so that’s significant and will intensify our growth.

But the 600 basis point improvement is really Van Heusen gaining market share, it’s Geoffrey Beene gaining market share, and it’s Calvin Klein gaining market share significantly for us. We’ve expanded our presentation with department stores. We think we’re taking away from some weaker players in the industry and actually taking it from private labels. The nice thing about both dress shirts and neckwear, it’s a replenishment business and as your inventory performs, you get replenished, you get the business.

So it’s not driven somewhat like sportswear business where it’s based a great deal on orders. So you get to re fill back in and we are just getting excellent replacement orders that is just helping to drive our business going forward. So I would say it’s driven more on the open price point branded business, both Beene and Van Heusen, but also the Calvin business has performed very well for us.

Kate McShane – Citi Investment Research

My second question is about your cash balance which has been building over the last two quarters. How should we think about this possible use for cash in both the near term and over the longer term?

Emanuel Chirico

Nothing’s changed at this point. We really just are going to see how this plays out before we really attack our capital structure in any dramatic fashion. So we’d like to see how that plays out. Our first priority would be to continue to look for acquisition opportunities, particularly ones that are branded in nature and potentially opens up the opportunity for an international distribution directly and that would be our first use priority, to use that excess cash. I think we’ve demonstrated the ability in the past with some of our other acquisitions to integrate acquisitions well, get them on our platform, then maximize the potential of the brands that we brought in-house. So that would be our first priority.

Operator

Your next question comes from Robert Drbul - Barclays Capital.

Robert Drbul - Barclays Capital

I guess the first question is on, you talked about inventory levels, is there a level of cleared inventory that you can talk to year-over-year as you’re heading into the back half of the year?

Emanuel Chirico

You broke up a little, could you say it again?

Robert Drbul - Barclays Capital

Is there a level of clearance inventory, are inventories down 30% on a clearance level in your stores and is there a number that you can put on around the inventory level overall?

Emanuel Chirico

Our clearance inventory at this point last year compared to this point this year is down about 30% so our pricing out the door is better since we don’t have as much goods. But the real opportunity on clearance will be fourth quarter when [the world exploded] and there was clearance everywhere. Even if you were clean you were forced to promote. So that could be a real opportunity as we go forward. So inventory has been down 8%, are very healthy, but it’s not only the percentage that it’s down, it’s the quality of the inventory has been going lower.

Robert Drbul - Barclays Capital

On the Calvin business with some of the shortfalls, you addressed it a little bit earlier, but when you look at the full year for the Calvin Klein business, in the back half, given some of the slight shortfalls we had in the first half, can you just talk a little bit more about your confidence level in these numbers materializing in the back half of the year?

Emanuel Chirico

Let me address one thing first. I guess if you look at a six month basis from where we initially guided the year when we came out of the box, we’re ahead of plan. There were some times when issues were clearly Warnaco being the biggest one in the second quarter for us, it was about $1 million miss on royalty. They went into great detail explaining what happened in the second quarter from a timing point of view and in fact they’ve increased their sales estimates to us and royalty estimates for the year although they were short in the second quarter.

So clearly I think they spoke in great detail about the timing of some of the club shipments, some of their international distributor shipments, in Europe, that were pushed out into the second and the third quarter, so I think that goes a long way to build in. We try to be conservative on some of the estimating here. For the balance of the year, we’re planning that business basically to be flat to down slightly and I think there’s opportunity to clearly outperform that based on the trends of the business and a big piece of that will be Warnaco so if they deliver what they’re saying, I have great confidence.

We built some level of cushion in for the second half on the fragrance side of the business, just what’s going on there, and I think that’s prudent given the kind of expectations and kind of growth that we’ve experienced in that business over the last two or three years and what’s going on there with consumers. So I think we’ve taken all the risk out of those numbers and we’ve given ourselves an opportunity to maybe over deliver again.

Just to keep it in perspective, I don’t know too many brands on balance for a year in this environment are putting on overall top line growth and that’s what Calvin Klein is doing overall. It may be 1% , but it’s still growth and I don’t know of that many brands domestically and internationally that are growing in this environment.

Operator

Your next question comes from Jeff Mintz - Wedbush Morgan Securities Inc.

Jeff Mintz - Wedbush Morgan Securities Inc.

To follow up on a comment you made earlier about sharp initial pricing on the fall merchandise, are we going to see actual prices changed on tickets from previous years or is this more of a markdown strategy?

Emanuel Chirico

I think it’s two things. I think it’s we source the product going in with plan opening promotions when the goods hit the floor, to be at price points. The MSRPs are not changing. What we are doing is, there will be key everyday low prices that hit the floor at value propositions that we think will drive the consumer and it will also be driven with opening markdowns, 20% off when the goods hit the floor to just entice the consumer and incentivize them to spend. I think that’s important in this environment. We built that into the plans. We’re doing it at wholesale in line with our retail customers and we’re doing it in our own stores as well. I think it’s a strategy that’s really working well for us.

Jeff Mintz - Wedbush Morgan Securities Inc.

Okay, great. Mike do you want to take this? Can you talk a little bit about the split in comps between Calvin Klein and the legacy businesses? Were they roughly similar or did you see some differences there?

Michael A. Shaffer

You’re talking about for the quarter?

Jeff Mintz - Wedbush Morgan Securities Inc.

Correct, for the second quarter.

Michael A. Shaffer

Basically the legacy businesses performed better than Calvin. The legacy businesses were down about 1% to 2% with Calvin down about 8% but when you look at comparisons, you really have to take a hard look at last year. Last year the Calvin business was running up against 8% to 10% comped increases so it was really up against very, very strong business which didn’t turn until the third quarter.

Emanuel Chirico

To put that in some perspective, the Calvin business for the first nine months of the year last year was up about 9% to 10% and for the last four months of the year was down 13%. We’ll start the anniversary of that around September 15, that dramatic change. So we’ve also seen in the Calvin business an improvement in comp store trends. First quarter we’re down close to 12%. Second quarter was down about minus 8%, and in July and early August we’ve seen the business down 5% to 6% so clearly we’re seeing a better tone to business there as well, it’s just up against dramatically higher comp store performance last year.

Operator

Your next question comes from Evren Kopelman - J.P. Morgan.

Evren Kopelman - J.P. Morgan

I have a question on the fragrance side. Historically when you look at the category, how quickly does fragrance improve as the environment improves? Is it as soon as high end department stores [traveling]? Is it that kind of a thing? And secondly on the price points, is there an initiative to try to maybe introduce lower price points or something like that on the fragrance side or is it more of either the customer wants it or not, it’s not incentivized, it’s not a need thing like in apparel.

Emanuel Chirico

I’m going to take that in pieces. On the recovery and what we expect, I don’t think we’ve experienced anything, I don’t think the industry has experienced anything like we’re going through right now since… you pick the time, 1930s? I’m not sure. Clearly at the high end you’re seeing that kind of pressure. The benefit that we will see, there’s two big benefits. Is there a significant in the last six months de-stocking of inventory at retail to get the inventory in line with the sales plan.

So going into September of last year, the fragrance business was comping positive, our Calvin Klein fragrance business. Going into the September period, inventories were very high, and there were plans for comp store increases and actually experience the minus 20% sales rate at retail. So we had a double hit for the first six months of the actual sales trends and getting inventory levels down.

Our inventory levels are now down in line with sales expectations are so I don’t think we’ll be seeing into the second half of the year the double hit on wholesale sales that we’ve seen. Fragrance sales at retail are down about 12% to 15% while wholesale shipments are down 20% to 25%, so that double impact I think is behind us and we should start to track more against the business. The second piece is, once we get to September, the sales comparisons just fall off the cliff on a relative basis so I think obviously we don’t expect to take another hit on top of that. We would expect to start to even off again type sales trend and in fact may see some improvement. So I hope that answers the first part of your question.

The second part of your question is based on pricing. We’re not doing anything dramatic on the price point. There are incentives out there, gifts with purchase, we’ve also, the Calvin Klein franchise is focused to a younger consumer at a sharper price point both domestically and internationally and that’s clearly an area where we’ve focused on, but with a franchise like Euphoria or Eternity, they’ve got such solid market position at retail. We are giving some gifts with purchases and some promotion opportunities, but we’re not looking to really move the retail at all and we don’t see any of our competitors doing it as well. So it’s an area we want to try to maintain the margins both for our retail partners and overall.

Evren Kopelman - J.P. Morgan

On the other side of licensing, G3 and [Jemlar], can you give us a sense on how large those businesses are and where they can get to? I mean the 20% and 30% growth rates are very impressive. I’m curious how long… is it growing off a very small base? Can you talk about that?

Emanuel Chirico

To put it into perspective, the G3 business overall, they have a number of categories. Outwear, men’s, women’s, women’s dresses, women’s suits. They just launched women’s better sportswear in the first quarter. They took that business over. They are quickly becoming our second largest licensee overall, probably combined will surpass fragrance in the next six months or so. So clearly there is a growth opportunity and their growth is significant.

Domestically, the footwear business could be over $100 million just on the women’s side and $50 million on the men’s side. Right now that business was projected to be about a third of that size in the US. Clearly we are under developed in footwear internationally and [Jemlar] has just taken that license over and we’re starting to see some good growth in some of our own retail space and also with wholesale accounts. I think those are two areas that could continue to be of significant growth as we go forward. Coty and Warnaco combined represent I would say about a little over 50% of our royalty revenues, so the balance is significant of the players out there.

Evren Kopelman - J.P. Morgan

Lastly we’ve heard from your peers this trend to shipment closer to the selling season from retailers. First of all, do you think this will continue into the spring, and secondly more of a… what are the implications of this if it continues, aside from the quarterly shift of sales, is there a longer term kind of risk or even opportunities if this were to continue?

Emanuel Chirico

I guess the first thing I would say is, through the first six months of the year, because of the performance that we’ve had in the second quarter in particular about $7 million of our sales in the quarter was driven by retailers pulling forward orders. If you’re performing at retail, retailers want the goods because what’s working is that they need, so for Izod, Van Heusen, our Arrow and Timberland businesses, and our dress furnishings business, we really are seeing retailers looking to pull goods quicker to keep the inventories and keep the stocking position so we’ve actually seen movement close to that.

On balance, I think retailers are trying to manage their markdowns and their clearance, so instead of taking in holiday goods in October, they’re taking some holiday goods in November and I think they’re doing similar things and making goods closer to selling season to keep a freshness on the floor and to keep a flow on the floor and I think some of that is what everyone has experienced as we go forward, particularly when you get the big selling periods like Christmas is goods that were planned to go in October last year are now going in the first week of November.

I think that has the ability to enhance your business if you have the logistic to support behind it to really continue to fill in the business and to continue to flow the business as you go forward and it’s an opportunity to improve I think the markdown performance at retail if you can keep the cadence moving or your systems are tiding well with your retail.

Operator

Your next question comes from Paula Torch – Needham and Company.

Paula Torch – Needham and Company

My question is about the wholesale revenues coming in better than expected. I was wondering if you could talk about your inventories in the channel. Are you comfortable with levels there and also if you could give us a little bit more color on your legacy sportswear, what would you attribute the increase to, is it the demand for [inaudible] your getting stronger or could you attribute some of it to your marketing initiatives with Izod?

Emanuel Chirico

I guess I would start by saying that the performance, I think what’s working at retail, any channel distribution is value. I believe our national brands, they tend to be more moderately priced, Van Heusen, Izod, Arrow, and Timberland, which is opening price collection business. Those brands I think are really playing to the environment right now. We are beating our sales performance at retail. I would say that we’ve been arguing with our retail partners that our inventory positions are too light at retail and we are trying to drive…

We think we are missing sales opportunity in retail and trying to flow more goods in behind it and we’re working very closely with them. A big advantage I think we have is we have 250 to 300 people in the field, merchandise coordinators who are keeping goods fresh, making sure the goods are on the floor, supporting our retail partners at Macy’s, Belk’s, Penney’s, Kohl’s, supporting our key accounts to make sure that we’re providing them service on the floor to make sure the right goods are on the floor and not sitting in the back room, so we’re getting those out at retail. The demand that we’re seeing, it’s always hard to say.

I think clearly the market conditions that we have in place with Izod. I think our team has done an outstanding job, positioning them at point of sale where the consumer can really see it, coupled with a national advertising campaign and we’ve really been able to activate the campaign at retail. I think you’ll see more of that in the third quarter with initiatives we’ve made in Van Heusen and JC Penney and you’ll also see a continuation of [inaudible] as that goes forward, so I think that always is a positive point of view. But, I really think is all the true value that our brand will deliver the consumer recognizes. We see it in our own retail business as performances improve dramatically and we’re seeing with that performance at department stores so I think right now the wind is at our back.

Paula Torch – Needham and Company

Great, thank you very much for the color and good luck.

Operator

We’ll take our next question with Omar Saad – Credit Suisse.

Omar Saad – Credit Suisse

You know, one thing that jumped out to me in the release was in the guidance, was the what you did with the low end of the range. You know some people might be focused on the fact that you didn’t raise the top end of the range or whatever. It seems like you’re inappropriately conservative. But, you took the low end of the range up quite a bit. Can you elaborate on what that means about what you feel about the risk levels out there from a big picture perspective, the risk levels out there and the environment? You know, that, are you getting that level of confidence from, you know from your own consumer research, you’re seeing your own stores or is it more on the department store side? Like overall consumer trend or is it really coming from the market share gain that you made or maybe a little bit of both of everything?

Michael A. Shaffer

Well, thanks Omar. I guess, you know look, we look at, we moved the bottom guide and because we just feel that, you know the uncertainty, the inability that we saw earlier in the year that protect the business, we really believe the business has stabilized as we think we found the bottom in the growing offers. As every day goes by, I feel better and better about the business because every day we can, we’ve been, the last six weeks in particular, we’ve been consistently beating our sales and margins. We can see the business, we see the order flow from our customers, we see the performance on a weekly basis with tidings with every major retail account so we see our performance at retail. You know, we are hitting plans, inventory’s clean, margins are good at wholesale.

In our own retail stores, we’ve got a real benefit that everyone else has, we have a 750 window into what’s going on with the consumer with our store base and it spread throughout the United States, in every state and every geographic area. So, we got a real picture of what is going on. We clearly see an improvement in our business. The only thing that gives me pause is what I read in the papers and people worried about back to school. Our back to school business has gotten off to a very strong start and I feel really good about where we’re transacting the last six weeks.

So, you know I can be oblivious to what’s going on around me but the performance we’re seeing in our business, both with Calvin Klein, particularly internationally and on that and our national monitor brand and domestically, we feel really good about what position we think our, you know our strategy of running a portfolio of [Bryant] is right and our brands are strong and outperforming the competition consistently. And, every day that goes by makes me feel better about it.

Omar Saad – Credit Suisse

Okay, and then I have a follow up on the Calvin Klein licensing. I think Mike made a comment about the licensees, you know they’re putting less behind the advertising. Could you elaborate on that a little bit? Is that more of a temporary thing or do you expect to ramp up in the future? How do you see that kind of investment behind the brand?

Michael A. Shaffer

Well, just to put that in perspective, last year we had the 40th anniversary of Calvin Klein and we were spending at record levels and from a marketing point of view across all our product categories. The advertisement spend is being planned down about $7 million to $8 million overall for the balance for the full year. About $5 million of that related solely to the 40th anniversary. So, I think on any level, we are still significantly outspending our competition. Everybody else is really pulled their head back here. We’re still spending overall in total marketing dollars, you know over $225 million plus giving what the price of media right now. Our dollars are buying us more so I think our share of voice is growing, if not diminishing. And our national brands is moving from Calvin Klein, we’re spending more this year than we did last year. I think it’s given the strength of our balance sheet, our financial position and just the good performance. This is a good time for over spend or spend more than we have because I think that you get a bigger share of voice because I think from a competitive point of view, you, a lot of our competitors are dark or hardly spending dollars at all. So, I think it really positions eyes on they use an arrow and a strong position against their competitor’s set.

Omar Saad – Credit Suisse

Manny, you made an interesting comment about taking share from private label. You know, what do you see there from your various retail partners? Are they still dedicated to that or are they turning to kind of pull back on the importance of that? It sounds like there might even be some shelf space shifting going on out there and obviously there’s increased risk for them carrying inventory, etc.

Emanuel Chirico

Private label continues to be very important in retail partners. They believe they need distinct brands and exclusivity. That continues to be a point. It’s a matter of balance, it’s a matter of what’s performing. You know, I, what I was talking about was neckwear and dress shirts, which is a significant EDI business and you gain share by performance. So, if we all have our fixtures and inventory on the floor and if your fixture is more productive, you gain a bigger share of the pie and as long as the retailer continues to fill in your goods, which they have, we gain more market share. So, we’re just more productive and we’re gaining more space because of that and I think to most of our retailers, where they are now, it’s in effect a mix between private labels and national brands. So, it’s just a matter of degrees. So, you know private labels still represent somewhere between 30% and 35% of the market. So, you know instead of 35%, is it’s 32% and it’s still very significant.

Omar Saad – Credit Suisse

But, it hasn’t exploded as a result of the recession.

Emanuel Chirico

Our experience is that when the environment gets tough, recession, whatever happens, national brands and values become more important to the consumer and secondly, I think we’ve been, you know I don’t want to, we’ve been smart about how we positioned our brands from a pricing point of view to continue to gain market share. Take advantage of our sourcing base and our savings and in order to continue to drive our promotional cadence and gain market share, because we just don’t have the clearance on the floor, we’re able to be more promotional or can open price points

Operator

Your next question comes from Jeffrey Klinefelter - Piper Jaffray.

Jeffrey Klinefelter - Piper Jaffray

One last question for me would be on sort of a steady state outlook Manny on your sportswear business. Given the portfolio you have, you’re taking share at retail now and in a negative comp environment. As we come out of this, whether it be next year or some run rate at some point next year, what is a steady state growth do you think for your sportswear business domestically? Is it going to be a function of retail comps? Is it going to be a function of continuing to take share? Just give us a sense for that.

Emanuel Chirico

In our heritage sportswear business, it is a share gain, it’s taking space away, outperforming the competition. I don’t think we’re really talking about significant door expansion on a constant basis. We’ve seen both Van Heusen and Izod gain more doors. Those brands work well as an all over strategy so if Macy’s has 800 doors, Van Heusen works in all 800 doors given its price positioning whereas some higher end brand, some potentially [inaudible] doors, just don’t perform at the same level, so Van Heusen is really an excellent vehicle for them to continue to provide a branded sportswear option and dress shirt option across the store.

We are benefiting from that, we’ll see more growth in 2010 as that door expansion intensifies with Van Heusen and Izod in particularly in department stores. Then I think it’s about performance and it’s about growing and it’s about us making an acquisition [inaudible] brands for the portfolio. We think that as growth potential is significant with Timberland, it’s about a $50 million business that could be we believe over time $150 million business.

We believe as the economy improves, clearly Calvin will regain its momentum in the sportswear area, that’s an area that’s been under a lot of pressure at retail collection sportswear and as that comes back, Calvin will benefit from it, and it’s one of the benefits of running a portfolio company, it gives you the ability to take advantage of each of the brand strength given the economic cycle that you’re in and how your customer base is doing that you’re able to pull a number of levers and not rely on one brand.

Jeffrey Klinefelter - Piper Jaffray

So you would say your portfolio is one that in a neutral comp environment you’re going to outperform the industry at least by a few points out of share gains and then you’re always going to have the add on acquisition potential at any given year.

Emanuel Chirico

I think that’s a concise way of saying what I said.

Operator

Your next question comes from Andrew Byrd - Post Advisory Group.

Andrew Byrd - Post Advisory Group

The last couple of years in the fourth quarter we’ve seen receivables drag out a little bit. Any reason to expect that trend doesn’t continue in the fourth quarter this year and I guess maybe just from a bigger picture perspective, can you give us some thoughts about how back half working capital should look like? Traditionally it’s been a source of cash for you guys.

Michael A. Shaffer

On our receivables, we were down 8% for the quarter. We are extremely clean and we really are on top of our receivables. We’re managing our business to keep our receivables as clean as possible. We’re actually a little cleaner than we were last year. As we look to the fourth quarter, I don’t see it dragging. I think we’ll continue to turn [inaudible] as we always have. We don’t have any issues or problems.

In terms of working capital, we do see that historical trends in our working capital will continue in the fourth quarter. We will do what we typically do which is generate the cash as we move into the fourth quarter.

Emanuel Chirico

Working capital will grow with sales expectations. No more, no less. If we are in the fourth quarter planning for sales growth in 2010, especially in the first half, we’ll build the inventory to support that and the receivables will follow the sales performance. Absent an acquisition, what happened I think in the last couple of years is we’ve had some brand acquisitions that have driven up inventory and receivables and we haven’t had the full benefit of those businesses in the fourth quarter so we’ve built up the receivables and we have to build up the inventory without the associated sales coming through, so I think some of what’s happened in the last two years both in our neckwear and dress shirt businesses in particular are clearly those acquisitions have worked exceedingly well for us as we’ve gone forward.

Andrew Byrd - Post Advisory Group

No doubt those acquisitions have worked well and the comment on the receivables wasn’t a comment on your ability to collect as much as it was one concerned about how quickly your customer was paying you. I know you guys do a good job of nudging and keeping them clean.

Operator

Your next question comes from David J. Glick - Buckingham Research Group.

David J. Glick - Buckingham Research Group

Manny, I was wondering if you could comment on the amount of retailer restocking activity that you’re seeing, what retailers are moving up orders, obviously you saw some benefit in Q2. What’s your ability to react to that and is there a possibility of seeing the benefit for Q3 and Q4 and as a follow up to that, what kind of conversations are you having about plans for spring 2010 for your brand?

Emanuel Chirico

I think in certain categories for us, dress furnishings being one and some of our basic sportswear, it’s easier for us to react to sales trends. Dress shirts in particular, we talked about last quarter that we are building our basic inventories to really be in a position to replenish EBI and we’ll continue to look at that as we go forward. Carry a little extra inventory that doesn’t have a lot of risk. We have been doing a number of sourcing initiatives in place including flying goods, moving production up, in order to try to stay ahead of the curve. On the flip side, we’re not going to take any risks, particularly on the fashion side, and carry inventory. This is still a tough environment. You don’t want to be going to secondary channels and have to move goods. Having our stores gives us a competitive advantage that we can take some risks where we see the opportunity, so we’re trying to be prudent about it and trying to react to it and if we get appropriate lead time, we can clearly react to it, but 30 days is not an appropriate time to go back in sportswear fashion. We don’t have goods obviously hanging around hoping for orders. We really have the inventory in line with the order book and we’re moving some production up in order to catch the demand.

David J. Glick - Buckingham Research Group

As far as spring 2010, kind of preliminary conversations that you’re probably had with some retailers by now this summer?

Emanuel Chirico

I think we are… trend is very good. We are getting more than our share of the open to buy. The retailers I think are… until we actually see in their sales performance some positive results, they are continuing to be conservative how they buy spring and some of them have initially made some plans to buy at a minus 3% to minus 5% open to buy to keep their inventories very clean and liquid and we’ve been pushing back on that and getting better than that kind of order book but I think as they start to see some better results, they’ll expand a little bit to buy and we’ll be able to capture more of it going forward.

So we’re not losing any shelf space. In fact, we’re gaining it, but I think a backdrop to that is some of our key retail accounts are still being conservative how they’re managing their open to buy dollars this spring.

Operator

Your next question comes from Chi Lee - Morgan Stanley.

Chi Lee - Morgan Stanley

Manny, you talked about retail margins getting to about 3% I believe at the annual meeting during the quarter. Is that 3% what’s embedded in the guidance or do you see more opportunity given the recent cop trends we’ve seen?

Emanuel Chirico

There’s clearly more opportunity. That was the guidance we were using as of the beginning of the year. I would anticipate that they could be better. They will be better than that going forward. You know, right now without any upside in the numbers, clearly, we're heading more towards 4% than 3%. And sales - the sales trends continue and margins continue there's opportunity to continue to outperform against that.

You know, in the - when that business was performing in 2004, 2005 timeframe, our retail businesses were 8% to 10% operating margin. So there's clearly a rebuild there and, you know, we have talked about 24-month period. But if this trend continues, we can get there quicker.

Chi Lee - Morgan Stanley

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

Emanuel Chirico

Yes. I think that's - look. The outlet channel always performs better when there's more integrity in pricing at retail. When you get into a situation like last year's late third quarter, fourth quarter, you know, where Sachs is 70 off and department stores are reacting to that, the value equation at retail is much improved.

I think, you know, let's keep in mind I think the price of gas is also a big advantage to us right now, relatively speaking. What it was, you know, during this period now, $140 now. Seventy dollars I don't think is much of an issue for people to get in their cars and make that investment particularly if they believe that there's a value proposition waiting for them at the outlets. And we've really positioned our brands to deliver against that value message in the outlet environment.

So I think the outlet environment is doing somewhat better, clearly much better than specialty retail. The trends are much better. Some of our competitors are seeing some improvement. I don't think to the degree we have, but they've seen improvement in the trends as well. Traffic is better than it is especially if you retail. And then I think we're just outperforming in the channel.

Chi Lee - Morgan Stanley

Great. Thank you very much.

Operator

And at this time we have no further questions. I'll turn the conference back over to our speakers for any closing or additional remarks.

Emanuel Chirico

OK, thank you very much for your time today. I understand there was a little bit of technical difficulty at the beginning. I'm being told, just so everybody's not worried, all you missed was the introduction of who was participating and some brief opening comments that clearly were covered in the balance of the call.

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

Operator

And once again, ladies and gentlemen, that concludes our conference. Thank you for your participation.

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: Phillips-Van Heusen Corporation F2Q09 (Qtr End 8/2/09) Earnings Call Transcript
This Transcript
All Transcripts