Emanuel Chirico – Chairman and Chief Executive Officer
Robert Ohmes – Bank of America/Merrill Lynch
Phillips-Van Heusen Corporation (PVH) 14th Annual ICR XChange Conference Call January 12, 2011 2:00 PM ET
Robert Ohmes – Bank of America/Merrill Lynch
We’re good. Okay, everybody, I’m Robbie Ohmes from Bank of America Merrill Lynch. I’m the Apparel and Footwear analyst here. It is my privilege to introduce Phillips-Van Heusen Corp. We have Manny Chirico, Chairman and CEO. I think a lot of you know him. We also have Dana Perlman, who heads up Treasury and IR for the company. With that, I’ll turn it over to Manny.
Thanks, Robbie. We get started here. Safe Harbor, I’m sure as the lawyers have told me, I can tell you, you make sure you read this. It basically says about all our filings are online; they’re available, financials, where we need. So just bring that to your attention as we go forward.
These are just talks about us from our performance post the Tommy transaction. How that has really changed us on a pro forma basis about $5.3 billion in revenues at the time of the acquisition. Today, the company consolidated guidance was to be about $5.8 billion to $5.9 billion in revenues.
When you look at how we are broken out as a company, this gives you a real sense of the business, 51% of our revenues are Tommy, 31% are Heritage, and about 20% is Calvin Klein. And when you look at the profitability, the point I’d really make here is that our Heritage business is over 80%, our Calvin and Tommy business represent over 80% of our profits. And by the time we get to the year-end this year, I’d expect it to be closer to 85%.
So the real story and the drivers of this business are really our Calvin and Tommy business. Our Heritage businesses are really one from a cash flow point of view. They delivered strong returns on invested capital, and at the same time they really have helped us make the acquisitions of both Calvin Klein and Tommy Hilfiger.
And when you think about us again, Calvin and Tommy being our growth brands. Our Heritage business is really being the part of the business that really just has helped us pay the bills. And we license a number of brands particularly with our dress shirt and neckwear business. I will get into this in more detail when I get into the presentation.
Calvin, this has been a real growth story. We bought this business back in 2003. At the time the brand was only about $2.5 billion in global retail sales. We will end this year in excess of $7 billion, close to $7.3 billion. That’s a compounded top line growth rate of excess of 13%. This has been terrific acquisition for us as we’ve gone forward.
And at the same time, besides the top line growing at 13%, our bottom line in this business given the licensing business that we operate and some of the wholesale and retail businesses in North America, our bottom line is growing in excess of 20% during that period of time.
And this gives you a sense of the growth that we’ve seen from the $2.8 billion to the $6.7 billion, and we think there’s clearly a significant growth going forward. We target from a financial point of view 8% to 10% top line growth for the business, which over the next three to four years would layer on about $2.5 billion of global retail sales.
We have been growing consistently in last three to four year closer to 13% to 14%. So the growth is being driven more internationally than domestic. We’re growing probably almost twice as fast internationally as domestic. The business breaks out today on a sales base about 50% in the U.S. – in North America and 50% outside North America. And Asia representing just under 20%, South America representing just under 10%, and Europe representing just under 20% of the business.
So just to give you flavor for how the business breaks out from a branded point of view. It is a very profitable business, about $1 billion in sales made up of a two real key components. A business that we operate, wholesale sportswear business and a retail business throughout North America that does in excess of $600 million in volume, that’s $650 million in volume and $350 million of licensing revenues and royalties, which is obviously a very profitable component. All together, our operating margins here are north of 25%, when you put it all together.
So we’ve really been able to see some significant top line growth. If we can grow the top line 8% to 10%, we’re very comfortable growing the bottom line in this business closer to 15%, just the flow through based on the expense base that we had in the business.
Some of our biggest license categories and partners [Monaco], principally jeans and underwear worldwide, our largest licensing partner. About 38% of our overall royalties come from [Monaco]. I’ve really seen significant growth internationally. They’ve been a great partner for us as we’ve gone forward, they’ve really worked together with us marketing the brand, positioning it internationally and their own performance has been outstanding, and we’ve benefited for that growth collecting royalties as we have gone forward in positioning the brand internationally at a very high premium position. And it really served us well.
The Coty business, fragrance is a great category. Besides being a great profit driver, we also do a significant amount of marketing in this area. Coty this fiscal year 2011 has been somewhere between $75 million and $85 million, marketing the fragrance franchise of Calvin Klein, Euphoria, Eternity CK One. Those brands are very large, it is the second or third largest designer fragrance business in the world. It’s men’s and women. It is a truly global fragrance franchise, and it really helps solidify our position as a brand going forward.
G-III is really our women’s partner in United States sportswear, dresses, suits, outerwear. They’ve done a terrific job. We’ve just added accessory and handbags in the first year. They’re doing over $30 million in department stores next year. I’d expect that to at least be $50 million. So just been a great partner for us. We’ve seen significant growth. As a licensee, that business has grown consistently over the last three to four years in excess of 20%. So just strong performance there.
We talked about – this is the business we run directly in the last 12 months, about $622 million in sales. Our wholesales business, very strong performance, Macy’s is a key partner here, but we’re also obviously in Gillards, Bloomingdales and really have positioned the brand on mens and these – the sell throughs, the AURs for the full season are up about 9%. The sales plan again is up about 17% versus last year at retail dollars. And we’re seeing double digit growth from a wholesale sales point of view here. The wholesale, a very strong performance continues; very profitable business.
We operate over 100 retail stores throughout the North America, over $400 million in revenues. Our comps here for the fourth quarter are in excess of 15%. The performance has consistently improved through the fourth quarter. November was very strong at about 11% to 12%, December and January has even been stronger, the warmer weather, most outlet centers are outdoor. The Calvin brand in this channel of distribution really benefits from international tourism; about 20% of the volumes that’s done through these stores are with international tourists based credit card data. So it’s been a very strong performance, very profitable business as we’ve gone forward, and we don’t see it slowing down at this point.
Okay. I’m going to move to Tommy now. The Tommy business will end 2011, the brand doing close to $5.5 billion in sales. Top line growth in excess of 15% for the year. If you look at the portfolio, and the geographic breakdown, a little bit different from Calvin, which was North American more focused. Here, North America represents about 35% of the volume, Europe about 45% of the volume, and then Asia and South America 10% each. So clearly, there is an opportunity here in the Asia and South America markets to really grow that faster.
The strong premium position that we have throughout Europe, Asia and South America, average unit retails in Europe in excess of 80 euros, that compares in the United States our average out the door of retailer is closer to $35 in sportswear, and we’d like to move that closer to $40, but that positioning is how we see the brand going forward. And we continue to have a premium position globally.
There is over 1,000 stores. We operate a little bit over 500 directly ourselves. Retail in Europe represents about 30% of the overall volume. The vast majority of our international stores are regular price stores, maybe about 8% to 10% of the stores are outlet, 90% of the stores are regular price in some of the best shopping streets throughout Europe. We are in 30 of the top 35 markets where we need to be from a flagship store point of view, Rome, Milan, London, Paris. We made those investments.
The nice thing about those stores that doesn’t happen in the United States is for flagship stores. Those stores principally break-even with the exception of Paris, all of our flagship stores break-even to make a few dollars. So they, besides being great marketing hallows for the brand, they also drive cash flow as we go forward.
In addition to that, we operate another 400 stores for profit, more mall-based stores, street-based stores in big cities throughout Europe that are very profitable, 20% in-store profitability.
Again, since the acquisition, we’ve substantially stepped up the marketing of the Tommy Hilfiger brand worldwide. This year, we will spend in excess of $180 million marketing the Tommy Hilfiger brand. We’ve added about since acquisition on an annual basis about $30 million of marketing expense that is on media and public relation. So directly for the brand, we believe its paid dividends for us, the Meet the Hilfiger’s campaigns is really been a growing success for us. We market that in our own stores and we market that globally in the United States, Europe, and throughout Asia and South America.
The performance has been really very spectacular for us. The brand has really preformed exceedingly well. You look at the breakdown, we will be over $3 billion in revenues. When we finish up this year, operating profit margin will approach 12% overall. Europe is closer to 13%, America was just slightly above 10%. So the model really works extremely well for us.
In Europe, as I said, about 72% of our volume is wholesale; just under 30% is retail. We’ve seen very strong performance. See it’s the type of growth you see overall, the Europe business for last years has grown at a compounded annual growth rate of in excess of 20%.
Our spring 2011 bookings are up 13%, the early pre-fall bookings are up about 15%. So this business is more northern, central European focus, 65% to 70% of the business is central and northern Europe, 30% of the business is southern European business. That’s a big advantage that we have given the economic environment that we’re dealing with. Our biggest markets continue to grow and we see a lot of our smaller markets like Italy, France is the ability there to based on the size of those markets, we continue to grow in those markets despite the difficult environment. So to put it into perspective, Germany for us is about $400 million business, Italy is about a $50 million business for us.
We would expect that over time, Italy should approach 80% to 85% the size of the German business. And clearly, we’re underdeveloped and under penetrated in Italy. So we’ve been growing in a double digit pace throughout Italy, but even as the economy has slowed, we continue to grow in the high single-digits as we introduce new product categories into that market, as we increase the square footage that we operate directly there. So even in a tough market, we’ve been able to grow.
Spain, which is principally a wholesale model for us with our El Corte Ingles our major customer there. Even with the difficulty in the environment, that business is growing 5% in fiscal 2011, as we’ve introduced some new categories, and we brought in the assortment within our El Corte Ingles.
So again, we just went on sale with our full line, the market reaction, it’s too early to really quantify exactly where we are, but we feel really good about it. The guidance we gave last night really has got full holiday planned up 5% against the trend rate, which is double digit, and we would be disappointed if we didn’t exceed it, close to 10% to 12% for full. Our more visibility into that as we move forward in the next few weeks, as we get into middle of February, but the reaction from the market and our customers continues to be very strong. So we feel very good about the European business in a very uncertain macro environment.
And let’s just talk about some of the markets that we already did. Focusing in on the North American market, this business is about $1.3 billion. It is 80%, retail; 20% wholesales. It is complete opposite of the European model. We are exclusive with Macy’s here. The wholesale business is marginally profit and the retail business is very profitable.
It’s the model we have going forward. We’re trying to improve the positioning of the brand in the States that has gone through a series – if you know the brand, it’s gone through a series of mid-steps, if you go back to 2005, 2006 and has really been in a reestablishment, repositioning and the brand is on solid footing in the States getting very strong performance.
AUR’s over the last two years are up each year 8% to 10%. And we’re going out to do a close to the 35% now where three years ago we’re going out do it below $30. So clearly we are starting to see really strong performance. Our own retail stores, as I said, the comp store performance first half it was up 11%. As we got into the third quarter, even stronger performance and fourth quarter has continued North America in excess of 12% comp store growth. So the business is very, very healthy and very profitable.
When we look at some of the markets and opportunities, Latin America through Central America is about $300 million business. The interesting thing here is Brazil only represents 15% of that $300 million. So we have a very big Central American business, very big business in the rest of South America, but significantly under developed in Brazil. We need to build our partnership there. There is challenges to do business in Brazil from a sourcing operation supply chain point of view. It’s a industry that is protected and we’re really trying to find the right partner that we can expand it and grow it. Brazil is a big opportunity and we’d hope in the next six to nine months. We would have a new partner.
Asia, we announced a transaction where we owned 40% of the joint venture relationship in China. We collect royalties, full royalties from that joint venture and we own 40% of it. We did a similar transaction in India, where we own 50% of the joint venture partner. Over time in both places next three to five years, I would expect that we would either buy out in totally our partner or buy out a portion of that where we’d have a majority ownership. It’s a good way for us to build the business in a profitable way, keeping some of the start of course of all books and part of the joint venture, and as we grow it then to buy the business at that point in time when we are comfortable with the operation.
So, Asia and South America as we look at are really significant growth opportunities for the brand as we look out to 2013, ’14 and ’15 and to keep this dynamic growing. And as we talked about the growth targets, we set the targets to grow 8% to 10%. Since acquisition, the brand has been growing close to 15%. Our guidance is based on 8% to 10% topline growth. We think we can clearly outperform that, but it’s a good way to start the year and it allows us to still deliver the expectations that the street had.
Clearly, there is opportunity to grow. When you think about the Ralph Lauren brand, when you compare it to Tommy and Calvin, Ralp Lauren is close to $12 billion brand. At this point in time, the Tommy business is just over $5 billion and the Calvin business is just over $7 billion. Significant runway and ability to grow both brands based on the demand for the brand and the geographic footprint of both brands.
I’m going to quickly go through our Heritage business. Historically, this has been a 10% operating margin business for last six years. This has been a very challenged year for our Heritage business, particularly, our sportswear business. 40% of this business is our dress shirt business. We are the number one dress shirt supplier in the world. We’ve got about a market share in the United States of 35%. It’s a business that operates at a 12% operating margin. Our sportswear business is a very challenge this year, we’re disappointed with the performance, but we are on a very low base and we think we can perform off of that.
We are not planning in the guidance to get back to any where near our 10% operating margin growth. At this point in time, we are looking for gradual improvement over the next three years to get back to that. We think we can outperform against that, so we’re really tightening this business down, screwing it down and managing it for profitability and cash as we go forward.
I’m going to quickly do the financial highlights. I think you know we’ve had a spectacular year. I’m going to, the type of growth we’ve had since we always measure ourselves against the Calvin Klein acquisition. Top line growth of 18%, bottom line EPS growth during this time in excess of 20%. We talk about the real growth vehicles being Tommy and Klein how that bode for us, spoke about that. I’m looking for the guidance page, which seems to be lost.
We updated guidance last night. Just to remind everybody, we updated guidance in the second week of December we reported here. And we increased the fourth quarter $0.05 a share up picked on the revenues where we were. So we feel good about that, very confidant we’re going to deliver that and I think we can do better.
And we decided it’s a little early, but we decided so we could be able to talk about 2012 with some more specificity. We wanted to just box the consensus estimates that were out there and then be able to talk about it. So we basically said $5.90 to $6, we feel very confidant in that EPS guidance that we gave for next year. The real idea here is to put a floor out there to give some confidant to the investment community because there is a lot gangrenous and nervousness about what’s the effect of foreign currency, the euros down 11%. How is that going to impact you when you translate earnings? You got big European business, big international business.
So we wanted to put all that out there and I think our press release does a good job of laying it all out. We put all that guidance out there. We’ve planned the business to really be within our financial model, not off of current trends. We’re planning retail comps in the 3% to 4% range for Calvin and Tommy even though they are trending right now double digit increases. We’ve planned our Heritage businesses to actually shrink and put that into the model, and the Calvin Klein business, we’re looking to grow in at 8% to 10% overall rate.
So nothing at all what we would consider heroic from our guidance point of view, our margin point of view, we think it’s just a continuation of a process and our model. So the biggest concern we have is when we look at the business is the uncertainty that’s just out there in the world, particularly, Europe, the United States actually feels pretty level set right now, and I am more confidant about North America today then I was 12 months ago. But it would be disingenuous of you not to say that Europe even though we are performing and clearly are performing just about everybody there.
And from a competitive point of view, the European economy is more uncertain, retailers are very nervous about how they’re buying inventory and we’ll be cautious how we plan the business. Based on our order book, comp store trend, we don’t see any type of a slow down and we’re trying to plan the business conservatively, but at the same time recognize the kind of growth that we’re seeing with the brand, within Europe and the rest of the international market.
And with that, I’d say we are in a break out session. And I invite you all to be there for question and answers. I am already a little over the time. Thank you very much.
[No Q&A session for this event]
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