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Executives

Deborah Abraham - Vice President, Investor Relations

Joe Gromek - President and CEO

Larry Rutkowski - Chief Financial Officer and EVP

Helen McCluskey - Group President of Intimate Apparel

Frank Tworecke - Group President of Sportswear

Analysts

Sean Naughton - Piper Jaffray

Jennifer Davis - Lazard Capital Markets

Brad Stephens - Morgan, Keegan and Company, Inc.

Gretchen Hoggey - JP Morgan

Clark Orsky - KDP Investment Advisors

Susan Sansbury - Miller Tabak

David Glick - Buckingham Research

Warnaco Group Inc. (WRNC) Q3 2007 Earnings Call November 5, 2007 4:30 PM ET

Operator

Good afternoon. My name is Mary, and I’ll be your conference operator today. At this time, I would like to welcome everyone to the Warnaco Group Incorporated Third Quarter 2007 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers remarks there will be a question-and-answer period. (Operator Instructions)

Thank you. It is now my pleasure to turn the floor over to your host, Vice President of Investor Relations, Ms. Deborah Abraham. Ma'am, you may begin.

Deborah Abraham

Thank you. Thank you everyone for your patience. We apologize for the delay. We had a little technical glitch with the wire service this afternoon. We’re going to begin with a business overview by Joe Gromek, Warnaco President and CEO, Larry Rutkowski, our CFO will briefly review financials and our Group President who will take you through some segment highlights. And then following our comment we’ll give you an opportunity to ask questions.

Today's comments are based on Warnaco's as adjusted results, which exclude the results of the designer swim brand to be discontinued, as well as, restructuring expenses. The company believes it’s important for users of the company’s financial statements to be need aware of the adjusted financial information, as these measures are use by management to evaluate the operating performance of the company’s continuing basis on a comparable basis.

A reconciliation of actual results to the as adjusted result is available in the schedule the company today's press release, which can be found on the website at www.warnaco.com. We also remind you that as in the past our Group President will discuss segment-operating results excluding the allocation of shared services expenses. These allocation amounts can be found in the tables attached to our earnings release put out this morning -- this afternoon, as well as, our Form 10-Q.

Finally, today's call may include comments concerning the Warnaco Group's business outlook and may contain forward-looking statements. Any forward-looking statements and all other statements that maybe made on this call that are not based on historical fact are subject to risk and uncertainties, actual results may differ materially.

Information concerning a fact -- a number of 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 Warnaco's Form 8-K furnished today.

Now, let me turn the call over to Warnaco’s President and CEO, Joe Gromek.

Joe Gromek

Thanks, Deborah. Good afternoon. We are very pleased with our third quarter results, which reflect continued positive momentum in our global business, strong response to our product offerings worldwide and the benefits associated with the greater concentration of international and direct-to-consumer revenues.

Top line revenues were up over 13% and operating income increased 28%. A 200 basis point increase in gross margin this quarter help drive a double-digit operating margin.

In the third quarter, we continue to execute on a key strategic initiatives namely maximizing the opportunities of our Calvin Klein brands, growing our direct to consumer business and expanding globally.

We continue to capitalize on the international appeal and potential of our powerful Calvin Klein properties. For the quarter, Calvin Klein worldwide revenues grew 23%, well above the targeted annual goal of 15%.

We benefited from the growth in the Calvin Klein business both domestically and abroad, as well as, through the direct-to-consumer channels. We continue to believe we can double our $1.2 billion Calvin Klein business over the next four to five years, expanding and optimizing this powerful portfolio.

We also grew the direct-to-consumer channel, our owned retail revenues accounted for 18% of total company revenues. Our retail business continue to yield strong returns during the quarter with four wall contribution margin in excess of 20%.

Retail revenues increased 32% and as we expanded the store base and increased productivity. At the end of Q3, we operated almost 700 points of retail distribution and now expect to exceed the targeted 50,000 square foot increase in retail space this year.

Our international business continues to out perform, revenues increased 26% and for the first time accounted for more than half of the company's total business. The revenue growth was particularly strong in Europe and Asia increasing 37% and 24% respectively. The developed markets in Europe and Asia continue to record significant gains in revenues and productivity.

We are excited by the progress in developing markets as well, where we continue to register strong growth expanding the global Calvin Klein footprint. In China we are looking at 60% year-over-year revenue gains and the business in Russia and Eastern Europe will nearly double in 2007.

After looking critically at our business, we determined that our financial resources and management focus are best spent on those brands that provide the greatest long-term growth opportunities.

Therefore in the third quarter we announce the restructuring of the swimwear business, we completed the transfer of the Mexican manufacturing operations and are making good progress under disposition of the designer swim brands. We are also in the process of exploring strategic alternative for the Lejaby business.

Looking ahead, we feel good about our business. While the domestic environment is challenging over 50% of our revenues and a majority of our profits are generated outside the US. The diversified global business model, our unique profile and powerful brands are contributing to the strong performance.

The positive momentum of the past several quarters has continued into Q4 and we believe that fiscal 2007 will represent a year of significant growth for Warnaco and enhance value for our shareholders.

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

Larry Rutkowski

Thanks, Joe. For the quarter on an as adjusted basis, net revenues rose 13% to $473 million and gross profit margin increased 200 basis points to 43%. SG&A as a percent of net revenues rose slightly to just over 31%, driven by the mix of international interactive consumer business, as well as, $2 million of incremental marketing expense.

Operating income increased 28% to $51 million, compared to $40 million in the prior year quarter. Our effective tax rate in the quarter excluding the impacts of restructuring and discontinued operations was 27%, compared to 22% in the prior year quarter.

As a reminder, last year's tax rate substantially benefited from the previously disclosed Netherlands taxing authority. Income from continuing operations was $31 million or $0.67 per diluted share, compared to $28 million or $0.59 per diluted share in the prior-year quarter.

Our business continues to generate significant cash. As of September 29, 2007, cash and cash equivalents were $189 million, compared to $113 million at September 30, 2006. During the nine-month period ending September 29, 2007, the company used approximately $31 million to repurchase common stock understand our share repurchase program.

As a result of the restructuring process, we didn't repurchase any shares in the third quarter. We continue to have authorization to repurchase approximately three million shares. While reported year-over-year inventory was down 6% due to discontinued operations on a comparable basis inventory was up 10%, while revenues rose 13% in the quarter.

Now, turning to our outlook for the year. Based on the continuing positive momentum in our business we are raising our guidance. For fiscal 2007 on an adjusted basis, which excludes the designer swimwear operations to be discontinued and restructuring expense.

We now expect revenues to grow 11% to 12% over comparable 2006 levels and we expect income per diluted share from continuing operations in the range of $2.10 to $2.18 assuming minimal pension expense.

Now, let me turn the call over to Helen to review intimate apparel and swimwear.

Helen McCluskey

Thanks, Larry. Positive results continued in the third quarter for the Intimate Apparel Group led by an impressive 27% increase in Calvin Klein underwear, total revenue was up 19%.

Sourcing initiative and strong retail performance across all segments contributed to nearly 400 basis points improvement in gross margin. As a result, operating income yielded a 21% margin, which is a 35% increase.

The launch of Calvin Klein Steel has exceeded all of our expectations. Retail sales are well above what we planned and we are chasing production to keep up with demand. This is a perfect example of the impact of compelling product supported by strong marketing and in-store display and will service the model for future launch.

The success of Calvin Klein Steel fueled Calvin Klein underwear to deliver one of its highest revenue quarters in history. Consistently, strong performance around the world generated double-digit revenue increases in every geography and in wholesale and direct-to-consumer. We continue to gain market share increases in both men's and women's, and we believe there are still considerable room for growth.

Our strong revenue results translated to improve profitability with an operating income increase of over 36%. It was a great quarter for Calvin Klein underwear. With continued emphasis on delivering innovative product and marketing supported by the most recognized designer brand name worldwide, we expect double-digit growth to continue in upcoming years.

We are also pleased with the results in our core intimate brands. Both Olga and Warner's are enjoying market share gains with very strong results from new styles and expanded distribution of Warner's into J.C. Penney.

While revenue was down slightly due to reduced-off price in club volume, shipments to full price customers were up as was operating income. Key metrics are all headed in the right direction and we have got positive momentum as we move forward into 2008.

Turning to swimwear, we announced previously that we will divest or exit all swimwear brands except Speedo and Calvin Klein. That plan is being executed and progressing nicely. For Speedo and Calvin Klein third quarter results were below the prior year but were as expected.

The third quarter is generally a low shipping period for swimwear and as a result is not particularly significant. Revenue for the quarter was down roughly 12% versus last year. This is due to reduction in Speedo shipments to club, which is mostly a timing ship of our girl's swim seasonal set.

Gross margin was negatively impacted for the quarter due to inventory charges, as well as, under utilization in our manufacturing operations.

The transition of our manufacturing facility to a third party is complete and it is expected to provide benefit in 2008. We've also right size to swimmer swear division to reflect our focus on Speedo and Calvin Klein.

We are in the early stages of developing our long-range plan; I am impressed with the quality of the team and the enthusiasm for the Speedo brand and optimism of our potential.

Let me turn the call over to Frank to discuss sportswear.

Frank Tworecke

Thanks, Helen. The Sportswear Group registered another quarter of solid performance. Revenues increased 40% to $265 million, gross profit gained 250 basis points to 46.2% and operating margin was down slightly at 16% of net revenue based on planned increases and SG&A to support infrastructure and store expansion.

Starting with the Chaps brand. Net revenues declined $5 million to $45 million due primarily to compression of department store sales in Canada and the timing of club sales in Mexico.

Although, we experienced the decline in revenue, our operating income improved from 11% last year to 14% this year driven by a 240 basis point increase in gross profit. The operating improvement reflects the team's focus on presenting trend right product and incorporating the esthetics and quality inherent to the Chaps brand and insuring inventory levels are in line with sales.

Despite the effect that the warm weather has had on retailer's traffic in comp store sales. Our sell throughs for the quarter were at or above last year's levels resulting in decreased markdowns and turns.

We continue to focus on product presentation, competitive price positioning and aggressive marketing for the remainder of the year, as we drive towards annual double-digit margins.

Now turning to the Calvin Klein Jeans sportswear worldwide, where revenues increased 21% to $220 million with operating margin of 16%. Revenue in the Americas increased by 9%, while operating income grew to 21% of net revenue, a 100 basis point improvement over the prior year.

The department store channel was exceptionally strong in the quarter offset by a decrease of shipments to the club channel. Our new fall assortments are experiencing very positive sell throughs in both the tops and Jeans segment, and I believe we are well positioned for the holiday selling period.

The European and Asian marketplaces had a powerful quarter recording revenues of $138 million, a 30% year-over-year increase with operating margins of 14%. All aspects of the European and Asian businesses wholesale and retail, men's and women's along with accessories and CK sportswear posted positive revenue gains.

Operating income in Europe and Asia increased by $1 million in the quarter, as operating income results were impacted by the investment necessary to support our retail expansion and the timing of certain administrative costs primarily related to a one-time SOX compliance expense.

Year-to-date, operating income in Europe and Asia improved by a 130 basis points to 11% of net sales and we believe opportunity exists to further expand operating margins by year-end. We are very pleased with the quarterly and year-to-date results in our Calvin Klein Jeans and Sportswear businesses and believe this positive momentum will continue through the fourth quarter.

Joe Gromek

That concludes our prepared remarks. Operator, would you please begin the question-and-answer session?

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Sean Naughton from Piper Jaffray. Please go ahead.

Sean Naughton - Piper Jaffray

Hi. How are you guys doing today?

Joe Gromek

Great, Sean.

Sean Naughton - Piper Jaffray

First of all, congratulations on a nice quarter in Q3. I just have a couple of quick questions. One is around Europe, it sounds like Europe and Asia are both doing very, very well.

Can you break down further are you comfortable with saying anything specifically with how you are doing in specific geographies within any one of those groups?

Joe Gromek

Certainly. Sean, I think we indicated that our European business is up 36% and the Asian business was mid-20s and we were seeing the growth in Calvin Klein underwear and in Calvin Klein Jeans. So both businesses really had just phenomenal results in the third quarter.

Sean Naughton - Piper Jaffray

Yes. Is there anything specifically with any geography or like, are you seeing any better traction within Spain or UK, etcetera that stuff?

Joe Gromek

Yes. The Spanish market is hot for us for some time, I think our premiere customer there El Corte Ingles is experienced excellent sell-throughs and expansion of all the Calvin Klein properties that we have.

We've also seen, pretty positive results in Italy and on the Jeans side, they see an explosion going on in Eastern Europe specifically Russia.

Sean Naughton - Piper Jaffray

That sounds really good like Eastern Europe and Russia both sounded strong. And then specifically on the intimates business you mentioned that some of the improvements in gross margin came from sourcing.

Could you just talk a little bit about the specific sourcing initiatives you guys have in placed I know that you've have obviously divested the part of the piece that was Speedo or you have an agreement with Mexico. But is there anything else, could you talk a little bit more about the sourcing initiatives with an intimates?

Joe Gromek

Well, I think there sourcing initiatives are right across the board. Not just with intimates. And as you know we took over the -- our global sourcing operations about 18 months to 20 months ago and from a third party and that has provided us with several points of margin opportunity and we continue to work in centers of excellence around the globe to provide us with superior product and competitive pricing and I think our team has done a excellent job. Specifically intimates if you have a comment, Helen please jump in.

Helen McCluskey

On Calvin Klein underwear in particular I would mention that with our taking the sourcing it helps in creating our own office in Hong Kong. It's really giving us the visibility and the ability to roll up global requirements, which has helped us negotiate lower price points on some really big volume items. So that's one key area that has helped us.

Sean Naughton - Piper Jaffray

Okay. And then finally last question about the swim business. It sounded like it was a little bit down versus last year but it sounds like that was part of the plan. Do you guys have anything specific that you are thinking about for -- the Olympics coming up next year anything about the point of sale or anything fixed range, you guys plan on doing the capitalize on that opportunity?

Joe Gromek

Yes. I’ll let Helen take that one because last week I had an opportunity with Helen to view what's going on in Los Angeles in the collection that they put together, so Helen please take him through that.

Helen McCluskey

We have a lot of plans throughout in the Olympics they certainly think the merchandise here in '09 will be a great jumping off point, which actually kicks off with the Olympics. We've developed in store merchandising and secondary out post displays featuring Michael Phelps in a very big way.

And so we've got totally compelling fixed range and point of sale materials that were offered to the retailers in addition to some great products for all channels of distribution.

So I really think that the Olympics will be a great kickoff point and we intent to maximize or optimize that opportunity as our association with the Olympics. So I think will be in good shape, we are very excited about it.

Joe Gromek

I think one of the key factors that Helen mentioned was across multiple channels of distribution. So there will be an Olympic offering for each of the channel that we trade in, you know, that Speedo trades right across the board.

Sean Naughton - Piper Jaffray

Yes. Great. Thanks so much. Appreciate your time.

Joe Gromek

Thanks.

Operator

Our next question is from Todd Slater from Lazard Capital Markets. Please go ahead.

Jennifer Davis - Lazard Capital Markets

Hi. This is actually [Jennifer Davis] in for Todd and congratulations on a great quarter?

Joe Gromek

Thanks, Jennifer.

Jennifer Davis - Lazard Capital Markets

I have a quick question based on guidance and I haven't had a chance to come through all the additional schedules in the press release yet. But have you gone back or could you go back and restate Q1 and Q2 on an apples to apples basis so we can get to the full year number and adjusted results or is it in there?

Larry Rutkowski

Yes. Jennifer, Jennifer, actually schedule eight shows the discontinued operations, as well as what we expect to be discontinued in the first half of '08, by quarter, first, second and third both for '07 and '06.

Jennifer Davis - Lazard Capital Markets

Okay.

Larry Rutkowski

And should provide you that road map.

Jennifer Davis - Lazard Capital Markets

But you have gone back and backed out the discontinued operations from Q1 and Q2 of '07?

Larry Rutkowski

Yes. We have given you the details on that schedule.

Jennifer Davis - Lazard Capital Markets

Okay. Thank you. And then, I was wondering if you could talk a little about the structure of your international locations, are most of them licensed locations and how are they set up?

Joe Gromek

Actually, you know, they are owned locations and primarily and where we still have some distribution rights, we tend to claw those back over time. One of the unique qualities of the Warnaco operation today internationally, is we do have a global platform.

We are set up by region and by country, we have country managers which handle multiple brands for us and I think this is candidly the beauty of our operation today and affords us the opportunity of leveraging the talent in the organization across brands and customer relationships as well.

Operator

Our next question comes from Brad Stephens from Morgan Keegan. Please go ahead.

Brad Stephens - Morgan, Keegan and Company, Inc.

Hi. Good afternoon. Joe, you talked about wanting to double your CK revenues through the next four or five years, which will take you I guess from a projected to $1.2 billion again at this year this today $2.4 billion or $2.5 billion, over that period which would imply $250 million to $350 million a year of revenue growth or that be straight line or we back in loaded, how should we think about that?

Joe Gromek

Well, I think Brad, we've suggested for some time that 15% revenue growth for Calvin Klein properties would be a good benchmark for us.

Brad Stephens - Morgan, Keegan and Company, Inc.

Okay. And can you go little bit further and break that down for us. Jeans versus underwear domestic versus international and then maybe square foot as growth how does think about that in your retail locations going forward?

Joe Gromek

Okay. The first part is pretty easy. The domestic business is a low single-digit increase the international business is as mid teens plus increase. From a product standpoint, I think both like -- I think the Calvin Klein jeans business is where we initially saw the great opportunity.

Having said that, Calvin underwear has just had a phenomenal run over the last three years. So we see both doing quite nicely.

By geography, Europe I think is surprising us with its strength, you know, our businesses in, I think, as we indicated, our business in China has grown by 60% this year and we expect Russia to and Eastern Europe to double in '07 and we think we are just scratching the surface in this regard.

Brad Stephens - Morgan, Keegan and Company, Inc.

And square footage at retail, 50,000 square foot a year?

Joe Gromek

Yes. Well, we initially established 50,000 square feet for 2007 and that was going to be an approximately 20% increase on our 250,000 square feet. For '08 right now we are planning on 80,000 square feet and you know, I think we have an opportunity to even beat that number.

So we would like to continue to grow at a minimum of 20% and if the real estate is available and the opportunities exist, we believe that this is an excellent -- use of the cash on hand and we will continue to pursue this aggressively.

Brad Stephens - Morgan, Keegan and Company, Inc.

Fantastic. Best of luck.

Joe Gromek

Thank you.

Operator

(Operator Instructions) And our next question comes from Gretchen Hoggey from JP Morgan. Please go ahead.

Gretchen Hoggey - JP Morgan

Hi. Thanks for taking my question. Just wanted to ask have you met most of your holiday shipments at this point, do you think you read yet on the holiday season, how it is going?

Joe Gromek

Well Gretchen, we shipped a bit more in October then we typically ship, so we are pretty pleased about that. So and we are beginning to see the results of some of those shipments. I remember half of our business is done outside of the United States and a lot of it is done at retail.

As of now, there are not many surprises I think that, you know, we are seeing positive results in most quadrants and the domestic business is still running better than we expected considering everything we are hearing about the economy. Our brands are performing at a higher level I must say and internationally we continue to do very well, so we are optimistic about Q4.

Gretchen Hoggey - JP Morgan

Okay. Great. And are you finished with your holiday shipments at this point?

Joe Gromek

Well, we have a good deal of inventory to ship in November and December, you might say that December shipping is on the spring side of the business and November, the combination of replenishment product and some new goods and some of the introduction of the introduction of swimwear of Speedo. So, we'll continue to ship through the balance of Q4.

Gretchen Hoggey - JP Morgan

Okay. And just to confirm you are not thinking that the retailers are more conservative than last year from your standpoint?

Joe Gromek

I think they are very conservative but fortunately our brands are performing and the Calvin Klein brand is doing well domestically as well as internationally. It's hitting the ball out of the park, so we are pleased with that.

And I think as you heard from my colleagues, the Chaps business performed well both Olga and Warner's and intimates have performed well, so again we continue to be optimistic.

Gretchen Hoggey - JP Morgan

Okay. Great. Thank you very much.

Operator

Our next question comes from Clark Orsky from KDP Investment Advisors. Please go ahead.

Clark Orsky - KDP Investment Advisors

Yes. Larry just a quick question, do you have the depreciation and amortization for this quarter and the last year's period on an adjusted basis?

Larry Rutkowski

The depreciation and amortization for nine months today is just over $50 million. The in terms of the overall amortization I think to date is $10 million nine months to date. Let me give you amortization for the quarter is just under $3 million amounting.

In terms of look-forward, you can -- we disclosed in our filings that next year amortization should be at about $9.5 million. And depreciation on a normalized quarter would run $9 million a quarter at this point. Does that help answer you Clark?

Clark Orsky - KDP Investment Advisors

Yes. That's great. And what’s revolver availability at the end of this quarter?

Larry Rutkowski

The revolver availability as I recall is approximately $200 million today in the ballpark.

Clark Orsky - KDP Investment Advisors

Okay. Great. Thank you.

Larry Rutkowski

Sure.

Operator

Our next question is coming from Susan Sansbury from Miller Tabak. Please go ahead.

Susan Sansbury - Miller Tabak

Hi. Thanks very much. I have two questions. Joe, when you mentioned the -- if you will, the backlog the shipment number between November and December or the December inventory going for spring '08.

How did the retailers or can you share with us. How the retailers ordered for spring '08? That's an open-ended question. But I mean, do you think that they are continuing to be very, very cautious and do you expect some follow-on orders as we get into '08 or because we know they are being, they are trying to sit on inventory as the year closes out?

Joe Gromek

Yes. Susan, from our vantage point, first, they purchased the spring goods from us four, five months ago.

Susan Sansbury - Miller Tabak

Okay.

Joe Gromek

So I think the environment was different, we had no surprises at that time. You know, our brand were performing well, the products were reviewed by merchandising teams that came in and valued the product offerings as appropriately as they saw them.

And we believe that our products are trend right and our performance at retail around the globe was pretty positive and therefore, I think we got our fair share of what we would expect and so no surprises.

Susan Sansbury - Miller Tabak

Okay. It sounds silly in this environment but your ability to chase goods?

Joe Gromek

It is very difficult to chase goods. You know, we are looking at a supply time that’s, given transportation, raw materials and everything. If we had raw materials sitting in a factory, we might be able to do something within 60 days if the raw material are not sitting there it would take us much longer.

Susan Sansbury - Miller Tabak

Thanks. And then a question with respect to the share repurchase program. I guess it depends on the timing of these restructuring or divestiture initiatives. Is there a time frame? Can you -- are you at liberty at this point, it's only been a month since you announced these but do you have a better idea when some of these initiatives will be completed?

Larry Rutkowski

Well, Susan, the good news is we ended with $189 millions in cash at the end of the third quarter and as we said our priorities continue to be invest in the business and the combination of debt pay down and share repurchase.

And as you know, we were precluded in the third quarter because we had information of the restructuring that was not available to the street. So now with that change, we can definitely look at and I think we said that we anticipate the 3 million shares over the next several or roughly three to four years.

Susan Sansbury - Miller Tabak

Okay. So, but, are you in any way restricted from purchasing the shares by the -- and the agreements you have with Financo etcetera in terms of implementing these initiatives to divest?

Joe Gromek

Susan, the restrictions were in the third quarter when we had information that was not, that was material that our investors were not aware of.

Susan Sansbury - Miller Tabak

Okay. So the restrictions are off at this point?

Joe Gromek

That's correct.

Susan Sansbury - Miller Tabak

Okay. And debt repayment, if you had to prioritize, well I guess never mind. All right. I appreciate it. Thanks ever so much. Great quarter.

Joe Gromek

Thanks.

Operator

Our next question comes from David Glick from Buckingham Research. Please go ahead.

David Glick - Buckingham Research

Thank you. Good afternoon. Congratulations to the team on an excellent quarter. I wondered, if I could just get a little bit of help understanding Q3 versus Q4, obviously it's tough for us to estimate, quarterly earnings from -- due to club time and club shipments. And we've all done our best effort to restate the last year's numbers given the structuring you've announced.

Could you walk us through why Q4 would be down relative to last year, if we've in fact restated it correctly as the timing in club shipments are you being conservative? Just can we have your thoughts about Q4 of all, since your last announcement and if you just help us to understand on the year-over-year basis that will be helpful?

Joe Gromek

David, I'll give you generalization and pass it over to Larry. Remember last year, we were heavily back loaded to the second half of the year and specifically Q4, I think the good news for us right now is that we've been able to in fact live with the more normalized shipping pattern and it's a much more comfortable place to be. Larry you want to…

Larry Rutkowski

Sure.

Joe Gromek

Comment on the specifics, please.

Larry Rutkowski

Yes. Dave as Joe indicated in the fourth quarter last year we were heavily loaded especially with the club shipments, which we've been saying all year we shipped earlier in the year.

As I said, in the second quarter earnings conference call, we also had a increased marketing spend and that will be -- diligently will show in -- our expect to show an increase the marketing spend in the fourth quarter year-over-year.

And I think also, David. The other two important things, one is that the tax differential is worth, yes, a roughly $0.05 to $0.06, that's because we got the favorable ruling last year from the Dutch authorities, which was spread in the -- over the last half of the year, equally in the third and fourth quarter.

So, that tax benefit will help us. Plus the -- I am actually hurts us this year and helped us last quarters. And in terms of the last piece is you know, that the fourth quarter as reported will be adjusted down by about $0.05 to $0.06. And given the discontinued operation that we've announced in excluding the restructuring expense.

David Glick - Buckingham Research

And that should be for example, was profitable the last fourth quarter?

Larry Rutkowski

Exactly. Pulling out the Lejaby profitability, pulling out some of the designer swim set, actually were profitable in the fourth quarter and those adjustments.

David Glick - Buckingham Research

Okay. Great. And how would you characterize your outlook now for Q4 you still have obviously, a couple of months ahead of you and would you say that your outlook, you still feel it's conservative or you feel like this is a realistic outlook for the balance of the year?

Joe Gromek

We think we provided you with prudent information at this point.

David Glick - Buckingham Research

Okay. And then, one last question about next year you've given us some color on how we should think about the revenue growth rate but expand to the total company beyond just Calvin Klein.

Should we think of -- your international business as kind of up load it, low double-digits on the top line in domestic couple of load single for more of the kind of 6% to 7% outlook, is that a reasonable expectation going forward or not?

Joe Gromek

David, I think we will be prepared to talk about '08 at the call -- at the end of the year. So, I wouldn't jump the gun on this one at this point in time.

David Glick - Buckingham Research

Okay. Great. Thanks a lot. Congratulations and good luck.

Larry Rutkowski

Thank you.

Operator

Ladies and gentlemen, there appear to be no more questions at this time. I would like to turn the floor back over to Mr. Gromek for any closing comments.

Joe Gromek

Thank you very much for joining us. Sorry, about the technical difficulties that we had earlier and the delay this evenings. And we look forward to speaking with you in a few months and providing you with our year-end results. Have a good evening.

Operator

Thank you everyone. This does conclude today's conference call. You may disconnect your lines at this time. And please have a wonderful day.

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