Phillips-Van Heusen F3Q07 (Qtr End 11/4/07) Earnings Call Transcript

Phillips-Van Heusen Corporation (PVH)

F3Q07 Earnings Call

December 4, 2007 11:00 am ET

Executives

Emanuel Chirico - Chief Executive Officer, Director

Michael A. Shaffer - Chief Financial Officer, Executive Vice President - Finance

Analysts

Jeffrey B. Edelman - UBS

Jennifer Black - Jennifer Black & Associates

Emily Shanks - Lehman Brothers

Sean Naughton - Piper Jaffray

Robert Drbul - Lehman Brothers

David J. Glick - Buckingham Research Group

Omar Saad - Credit Suisse

Lee Backus - Buckingham Research Group

Jeff Mintz - Wedbush Morgan Securities

Brad A. Stephens - Morgan Keegan

Brian McGough - Morgan Stanley

Clark Orski - KTP Investment Advisors

David Berman - Berman Capital

Presentation

Operator

Good day, everyone and welcome to today’s Phillips-Van Heusen Corporation third quarter 2007 earnings release conference call. Today’s call is being recorded. 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 constitutes your consent to have 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 December 3, 2007. 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 our SEC filings.

The company does not undertake any obligation to update publicly any forward-looking statement, including without limitation any estimate regarding revenues or earnings. The information made available also includes certain non-GAAP financial measures as defined under SEC rules. A reconciliation of these measures is included in the company’s earnings release, which can be found on the company’s website, www.pvh.com, and in the company’s current report on Form 8-K furnished to the SEC in advance of this webcast and call.

Now for opening remarks and introductions, I’d like to turn the call over to Manny Chirico.

Emanuel Chirico

Thank you very much. Good morning, everyone. First of all, I would just like to apologize for the confusion we had with the conference call number. I think that’s all been resolved. We have over 115 people on the call so I think obviously the word got out about the misprint in the press release.

I would just like to say joining me on the call is Allen Sirkin our President and Chief Operating Officer; Mike Shaffer, our Chief Financial Officer; and Pam Hootkin, our Senior Vice President, Treasurer, and Director of Investor Relations.

Focusing in on the quarter, given the challenging retail environment that we’re dealing with and some of the macroeconomic issues that were also challenges we’re dealing with, we were quite pleased with the results for the third quarter. Let me try to get into each of our businesses individually. I’ll start with Calvin Klein.

Our licensing business posted a 25% increase in royalty revenues in the third quarter and just about a 30% increase in operating earnings. Just to start with, I guess the highlight fort the quarter for Calvin Klein was the Calvin Klein week at Macy’s. It was a major success, both from a marketing point of view and from the perspective of driving regular priced selling through the Macy’s doors. Our Macy’s business during that period of time across the board was up about 10% and that was in a pretty difficult environment when it was unseasonably warm weather, so clearly we felt that it was a major success for us, both from a brand perspective and from a perspective of driving business.

Looking at our individual businesses, our fragrance business continued to post strong growth. We had a 30% increase in the third quarter. That continued to be driven by the strength of the Euphoria franchise. That business, both men’s and women’s, continues to grow. It’s up high double digits in the mid-teens range.

Our CKIN2U business, which launched in the spring of 2007, continued its strong growth, particularly internationally. The CK brand internationally is really a key stone for us from a branded point of view. That business this year overall should approach between $130 million and $140 million in wholesale sales for our licensee, Coty, and the launch of Calvin Klein MAN was very positive in the United States. We started shipping that product in September. It was launched in Macy’s beginning with the Calvin Klein week and selling has been very strong through October and as we roll into the holiday season, that brand continues to do very -- that launch continues to do very well for us.

So overall, fragrance a big business for us, continues to grow very, very well.

Moving to Warnaco, our underwear business posted a 30% increase in royalties for the quarter. Strong growth with the launch of the new steel product, coupled with just an amazing marketing campaign featuring [Djimon Hounsou]. That business continues to do very well for us. We’ve gotten great reviews for the product as well as the marketing associated with the steel launch.

There continues to be very strong growth on the women’s side with our perfectly fit bra business. That business continues to grow both domestically and international. Business grew in the U.S. just about 20% and international, the business grew about 40%. The international growth was fueled by new product but also fueled by the continued opening of Calvin Klein underwear stores around the world, particularly throughout Asia.

Our jeans business was really driven by the international component of that. Our international jeans business overall was up about 20%. The U.S. business was relatively flat. It was up 2% for the third quarter but the jeans business internationally, particularly Asia and as well Europe, up about 20%. Very strong business there, also a continuation of opening doors throughout Europe and Asia under the Calvin Klein jeans overall banner.

In outerwear, we’ve had a very strong outerwear business in the U.S. Business is up about 25%. Our performance continues to be very strong. We are one of the top performers in the outerwear category, particularly at Macy’s.

Women’s suits and dress business continues to grow extremely well and continues to be a real highlight for us. So overall, we were very satisfied with the Calvin Klein business growing 25% overall on the top line and about 30% on the bottom line.

The only business that continues to struggle for us from a licensing point of view is our women’s sportswear business. We’re starting to see some better sell-throughs there and some better positioning but still not anywhere reaching our goals and targets for that business and we think it’s an opportunity as we look out over the next 24 months that that business continues to be repositioned and grown.

Moving to our operating businesses, our combined retail and wholesale business has posted a 22% sales increase and a 16% increase in operating earnings.

Let me start with our heritage business dress shirts. Dress shirts had a very strong quarter both from a sales and a margin point of view. The business continues to run ahead of sales plans and our average unit retails are considerably higher than last year, which helps to improve our overall margins and has increased the overall profitability of the business.

The business as we go into the fourth quarter of this year, the dress shirt business continues to perform very strongly and margins continue to hold up very positively.

At the neckwear division, our Superba acquisition is exceeding all of our expectations. The business is running well ahead of all of our initial plans. We believe that the acquisition will have earnings accretion for the year of about $10 million pretax. That’s worth $0.10 to about $0.11 a share and is significantly higher than our original expectations and even higher than the updated guidance we gave in the second quarter. So we really feel good about how that business is integrated in. We’re seeing very strong selling. We continue to improve the margin through sourcing moves that we make within the company, so we are very happy with that, where that business, the synergies with dress shirts has come across.

On the Calvin Klein businesses that we run ourselves, on the men’s sportswear side, that business continues to perform exceedingly well. We’re running well ahead of last year and are on plan for the fourth quarter. At department stores, Calvin continues to be one of the best performing men’s collection sportswear businesses when you measure it on a sales per square foot basis and a maintain gross margin business.

So that business continues to exceed our plans, continues to deliver. We’re in well over 500 doors. I think it’s 550 doors today and we continue to garner square footage in existing large doors that we maintain, so we are very happy with the performance of that business.

Our Calvin Klein retail outlet business had a very strong quarter. Comps in the Calvin Klein business were up just about 10% for the third quarter. That trend continues, being up for the fourth quarter and early -- for the month of November, our comps in the Calvin Klein business are up about 8%, so we feel very good about the Calvin Klein retail businesses. Margins are running ahead of plan, profitability running ahead of plan -- very positive about that.

And one of the businesses that we launched in the third quarter of this year, the IZOD women’s business has gotten off to a very good start. The business will ship over $30 million in the second half of this year and we’re estimating next year that sales will be in excess of $60 million as we go into the year.

Besides experiencing very strong sell-ins, we are having good sell-throughs. In this difficult retail environment, our sell-throughs have been good and have been on plan, so that business is really exceeding the initial estimates that we put on it and we feel good about how it goes into 2008.

The two businesses that are really being more impacted to us by the overall environment are our moderate sportswear business and our heritage outlet businesses, and I think it clearly from a competitive set point of view, both of those business categories are outperforming the competition. Our moderate brands, Van Heusen, Arrow, and Bass and to a much limited extent, significant IZOD are being impacted by the difficult environment in the third quarter.

In the third quarter, the unseasonably warm weather in September and October impacted our wholesale sportswear businesses. From a margin point of view, we saw some price compression and promotion and we dealt with that. It also impacted us from a -- in our retail stores from a comp store point of view, given the trends that we had been experiencing. Our comp stores in our heritage business for the third quarter were down about 2%. Overall, our comps for the third quarter were up 1% combined with Calvin Klein but our heritage business was down about 2%.

Gross margins overall from both wholesale and retail when you look at our businesses, was down about 200 basis points overall and that’s really dealing with the environment and the promotional selling that’s in place. As we turn into the fourth quarter for these two businesses, we’re planning -- our business and the estimates that we put together are planning for an aggressive fourth quarter promotional environment. We’ve had the markdowns in our plan. We feel very comfortable with that. Our allowances are in our plan. We feel very comfortable with that, so we feel we are well-positioned from an inventory point of view and we are well-positioned from appropriate markdown allowances and markdowns at retail that we need to take.

Our inventory is exceedingly clean. We are very comfortable with our inventory position at the end of the third quarter. If you look at our businesses and take out the new businesses, coupled with the calendar shift, our inventories are right on plan, exactly where they need to be and we feel very good about the inventories.

From a marketing point of view as we go into the fourth quarter, we continue to spend our marketing budgets. Our marketing budgets for the year are up on a dollar basis somewhat and on a percentage of sales basis are down slightly, but overall our advertising expense budgets for the year are up about $3 million to $5 million in total for the year and that’s off of a very high base in 2006.

So we continue to invest in our brand. It was a real intensification in marketing in the third quarter and that intensification will continue into the fourth quarter for all our brands, our own brands, Calvin Klein, IZOD, Van Heusen and Arrow.

Looking at the fourth quarter, we are very comfortable with the guidance we gave the street. We have factored in what we believe is more than sufficient markdowns to deal with the promotional environment that we’re dealing with, so we’re very comfortable that we’ll deliver our guidance. We believe it’s conservative and that we’re in good position to deliver the fourth quarter.

2008, if I could just touch on it, Michael quantifies some of this in more detail, but we are planning the first half flat. The big drivers of that are we’re planning the environment in a conservative fashion, as you look at retail in general, as we come out. So we’re taking a cautious view on the economy and the consumer as we go into the first half of next year.

We’re also being impacted by start-up costs in our Timberland business and our IZOD -- in our Calvin Klein specialty business. Our start-up costs for the year are flat overall and about $8 million to $8.5 million. But this year, 2007 our start-up costs were all back-ended, meaning third and fourth quarter. Within 2008, we’re planning for $8 million of start-up costs in the first half of the year against just about zero for 2007 last year.

So from a time point of view at start-up, that’s worth about $8 million in the first half coupled with a conservative view of the retail environment and the consumer.

In the second half, we’re being -- we feel good about the second half and we’re planning for growth in excess of 20% on the bottom line. Some of the contributing factors that give us confidence to do that is the timing of the start-up costs of about $8 million coming out of the second half, moving into the first half. The new businesses that we are launching, Timberland, IZOD, women’s, Calvin Klein Specialty in the second half of next year they begin to contribute more significantly to the profitability of the company and actually begin to instead of being a negative drain actually become a positive force for us.

We’ve also had the benefit of the stock buy-back program, which the way it’s being planned is more second half weighted as we’re planning for the buy-back to occur ratably over the next 12 months as opposed to being either front-end loaded, so clearly there are more benefits on the second half of the year than it will in the first half of the year.

And then finally, we are assuming a somewhat better overall retail consumer environment as we turn into the third and fourth quarter of next year. Our comps for the first half of the year are being planned flat to up 1% and our comps for the second half of the year are being planned up 2% to 3%. So when you look at it from that point of view, I think we are hopeful that we’ll see an up-tick with the consumer. We’re also planning our gross margins more conservatively in the first half, given the environment and more flattish towards the second half of next year.

With that, I’m going to turn it over to Mike Shaffer to quantify some of what I just reported.

Michael A. Shaffer

Thanks, Manny. As Manny said, we’re pleased with our third quarter results. EBIT to the third quarter increased approximately 21% over the prior year to $102.3 million. This EBIT improvement was driven by strong EBIT growth in our Calvin Klein licensing segment, with 29%, as well as strong growth in dress shirts, Calvin Klein men’s sportswear, and our new IZOD women’s sportswear and neckwear businesses.

Our EBIT margins for the quarter are under pressure and declined 20 basis points to the prior year. This decrease was the result of gross margin rate declines in our wholesale sportswear and our outlet retail division as a result of lackluster retail environment Manny earlier described.

Also contributing to the operating margin decline for the quarter was the shift of $10 million in advertising expenses from the fourth quarter to the third quarter. The advertising shift was most evident in the Calvin Klein licensing segment where we had very strong revenues and earnings growth with 29% over the prior year but operating margins remained flat.

Revenues for the third quarter were $696 million, a 23% increase over the prior year. The calendar shift impact as a result of the extra week in 2006 impacted the quarter favorably. If we exclude the calendar shift our revenue increase was 16% for the quarter.

Revenues for the quarter were favorably impacted by strong sales in Calvin Klein licensing, dress shirts, Calvin Klein men’s sportswear and our new IZOD women’s sportswear and neckwear businesses.

Earnings per share increased 18% to $1.05 per share and we’re $0.02 ahead of the consensus estimate and $0.02 ahead of the top end of our previous guidance.

From a balance sheet perspective, we ended the quarter with a healthy balance sheet. We have $337 million of cash on hand at the end of the third quarter and are projecting year-end cash to be over $450 million prior to any impact from the announced stock buy-back program.

Our inventories for the quarter were on plan and 18% greater than the prior year. Half of the inventory increase or about 9% was driven by our new businesses. The balance of the increase, or the other 9%, is related to the impact of the calendar shift, primarily on our outlet store divisions. The calendar shift caused the month to end up for October to be one week later, ending this year November 4th versus last year October 29th, and one week closer to peak Christmas selling. This resulted in a planned increase to the prior year in our outlet store inventories. If you strip out the new businesses and the calendar shift, our inventories are flat on a comparative basis.

We are projecting fourth quarter earnings of $0.51 to $0.53 per share, which is 9% to 13% greater than the prior year EPS. Our revenues for the fourth quarter are estimated to be $600 million, or an increase of approximately 8% before adjusting for the calendar shift, or 23% after adjusting for the calendar shift.

For the year, we’re raising our 2007 earnings per share guidance to $3.16 to $3.18, which represents an increase of about 21% over the prior year, with corresponding revenues estimated at about $2.44 billion, or an increase of about 17%.

Our fourth quarter and full year 2007 earnings guidance does not reflect any impact from our authorization to buy back 200 million of our common stock. The stock buy-back was approved on November 30th and is valid through the end of fiscal 2008.

Looking out beyond this year to 2008, we’re projecting earnings to grow 12% to 16% to a range of $3.55 to $3.65, with corresponding revenue increases of 7% to 8%.

Included in our guidance for 2008 is the impact from our stock buy-back authorization, which reflects $2 million to $3 million weighted average common shares being purchased.

In addition, our start-up costs for our new businesses, Calvin Klein specialty and Timberland sportswear, will approach $7 million to $8 million in 2008, approximately flat to the net start-up costs in 2007. However, 2008 start-up costs will be incurred in the first half of the year. This means that our first half start-up costs for 2008 will be $7.5 million greater than 2007.

And with that, we’ll turn it over for questions.

Question-and-Answer Session

Operator

(Operator Instructions) We’ll take our first question from Jeff Edelman with UBS.

Jeffrey B. Edelman - UBS

Thank you. Good morning. A question on the guidance, Mike; the first half will have more of a hit than the fourth quarter -- is this because of the seasonality of the retail business being much less profitable in the quarter getting hit with weak comps? Or is there something else we should think about in terms of potential build-up of inventory and then liquidation?

Michael A. Shaffer

There’s no build-up of inventory on liquidation. As I explained, our inventories are -- Manny talked about it too -- our inventories are very clean and really on plan with increases reflecting just the new businesses as well as this calendar shift issue. There’s no build-up.

Emanuel Chirico

The only other thing I’d say is our comp store performance last year through the first and second quarter, we were up 4% to 5%, so we are up against much more difficult comparisons in the first half of the year and you are absolutely right. From a profitability point of view, as you would expect, first quarter February to April, retail is not a major contributor of profitability so it does put some more pressure on it when you -- how you plan the comp.

Jeffrey B. Edelman - UBS

Okay, and just one short follow-up; in terms of your own production planning process, have you cut back on receipts for the first part of the year or are you just expecting to flow that normally?

Emanuel Chirico

Well, no. We would expect -- we’re going to flow according to our sales projections and expectations. There’s no issue there that we are in any way having to over-produce in any way, shape or form, so we are very comfortable with our production flow. We’ve gotten projections -- we have projections from our retail partners. We’ve got orders and projections on EDI and refill goods and they are clearly being cautious as they go into the first quarter next year. Even if they are planning for sales increases, they are trying to do it on the same or less inventory so that’s part of the challenge that I think the whole industry is dealing with and trying to manage that. So we’re doing that, trying to improve overall inventory turns but at retail and we’re also managing our inventories and managing our gross margin as we go forward.

So that’s all factored in. I think at the end of the year, you’ll see our inventories up 5% to 6% at the end of the year and that will be totally in line with whatever our sales increases are being planned for the first half of the year, given some of the new businesses that we are in the first half of the year versus last year.

Jeffrey B. Edelman - UBS

Great. Thank you.

Operator

Our next question comes from Jennifer Black with Jennifer Black & Associates.

Jennifer Black - Jennifer Black & Associates

Congratulations on a great quarter in a tough environment. I wondered if you could give us a little bit more color on the outlet business overall. You guys are really veterans in the business and I’ve heard that there are retailers discounting that have never discounted before in that channel. And then I wondered if you could give us an update on the opening of Calvin Klein outlet stores. Thanks.

Emanuel Chirico

Sure. I guess the outlet environment, the outlet environment as I said, our comps in the third quarter were flattish. I’ll give you a real overview. I’ll take you through the period of time. I think that’s the best way to do it because it will give you a sense.

Our comps, if you look -- the month of August, our comps were up about 2.5%. September and October combined were negative. When you put it all together, our comps for the period were up 1%.

As we came out of the third quarter and moved into November, the first three weeks of November we were feeling very good about our business overall. The business is up about -- comps were up about 2%. The weather turned beginning in November, the cold weather came in. We seemed to get more than our fair share of the business and the traffic.

As we got into the Black Friday/Thanksgiving Day weekend, I think a couple of things occurred. Black Friday was good. We made our plan. We had a good Black Friday. Saturday and Sunday, we missed plan and we actually ran negative comps.

I think if you look at what happened in the environment outside the outlet environment, I think clearly some of the large retailers, the big box retailers, department store retailers, the mid-tier retailers, all of those really, they took their advertising voice and they really hit home with the consumer.

I think a number of them in mid-November had re-estimated their earnings and really put more promotional markdowns into the selling mix and they really went after the business at Black Friday, and I think they won the share of voice for that holiday period and I think they drove traffic to the malls and to the big box retailers. And I think it had somewhat of a negative affect on the outlet environment in general.

Our business came back post the Black Friday period and we were having a nice business. I think everybody that runs outdoor retail got hurt over this last weekend, given the weather and the storms that we dealt with but we feel pretty good as we turn towards home.

I gave you that whole background more or less to say it’s been a little schizophrenic, it’s been up and down, unsettled. The one thing I can say, the environment is very promotional and it’s not just an outlet environment. An outlet is really a function of what happens around you but I think if you look at traditional retail and the big box retailers, a number of them are very promotional and in order to drive traffic and drive units, our first priority as we go into this fourth quarter is to come out clean as we go into 2008. And I think we’ve more than provided for the markdowns we need in order to get us there. We’re very comfortable with the fourth quarter estimate. We have plenty of room if the comps are a little softer that we can still deliver the year, given the gross margin and the promotional markdowns that we put into our plan, so we’re comfortable we can deliver against the results in the fourth quarter.

Overall, I think you said the Calvin Klein retail openings --

Jennifer Black - Jennifer Black & Associates

The outlet.

Emanuel Chirico

On the outlet side, that continues. We opened about seven stores this year. That’s on plan, on target. Those stores, Calvin Klein continues to outperform across the board. The new openings are exceeding our plans. The Calvin Klein comps are exceeding our plans and their profitability so it’s all very positive at Calvin Klein.

Jennifer Black - Jennifer Black & Associates

Okay, one last question, Manny; in the outlet business, did you see any great weakness in certain areas of the country?

Emanuel Chirico

You know, I guess Florida continues -- and this is nothing new -- Florida continues to be a region that’s challenged. With the Thanksgiving week, the Midwest was hit negatively, driven by I think it was all weather between snowstorms, unbelievably cold weather compared to the prior year, which was unseasonably warm. So all of that put together, that’s what we’re seeing geographically. But I want to be honest with you -- with the exception of Florida, which has been consistently an under-performing area, the geographic spins month to month, week to week have been pretty volatile as well. Northeast is great and then it backs off. California has been great and then it will have a couple of bad days. It’s very unsettled in general but that’s the best I can do from a geographic point of view.

Jennifer Black - Jennifer Black & Associates

Thank you very much. Very helpful and good luck.

Operator

We’ll take our next question from Emily Shanks with Lehman Brothers.

Emily Shanks - Lehman Brothers

Good morning. Just a couple of questions; I wanted to see if you could speak specifically to the new Calvin Klein specialty retail stores, not the outlet ones -- how the performance has been and then in terms of the plans for next year, what the number of store openings are that you are targeting.

Emanuel Chirico

Sure. Just to remind everybody, our plan is to open five stores in the fourth quarter this year. Two stores have opened. They’ve been opened less than approximately 10 days, the two stores. We are very happy with the way the stores look, very happy the way the product has been presented. One store is in a new center in Partridge Creek, Michigan. One store is in a new wing in the Lennox Mall. We’re very happy with the way the stores have initially started off but again, it’s a handful of data on information.

The other three stores this year will open probably right before Christmas, as they’ve been delayed with construction issues and permit issues but more or less, that’s really not causing us much of an issue.

And the plan for next year is to probably open five stores and that plan is unchanged at this point in time. And just to remind everybody, the Calvin Klein specialty stores are a test. They are both a test from a marketing point of view and a test from a sales/profitability point of view. We are really positioning these stores as showcases for our white label products so that we can really present to the consumer in some of the best real estate in America the Calvin Klein brand, and we’ll see what the opportunity for that store might be down the road over the next four to five years but it’s a very long-term, focused strategy.

Emily Shanks - Lehman Brothers

Great. Thank you. That’s all extremely helpful. And my second question is really around SG&A. It looks like you did quite a nice job this quarter controlling it. I wondered if you could just give us a little bit of detail around that, as well as just help us understand a bit of the commentary and the guidance around the fact that while $10 million was shifted from 4Q into 3Q, ad spend is going to be up year over year in the fourth quarter. We just want to make sure we understand that.

Emanuel Chirico

Sure. Michael will talk about SG&A and I’ll talk about the advertising. The advertising spend for the year is up about $4 million, 2007 versus 2006. For the fourth quarter, given the calendar shift that the first week of November moved, given what happened with -- given that last year we really intensified so excessively the fourth quarter, from the beginning of the year we’ve been saying that we’re going to spread the advertising more ratably, particularly over the third and fourth quarter. So the biggest impact was our third quarter advertising spend is up about $10 million over last year and we expect our fourth quarter advertising spend to be down somewhere between $8 million to $10 million, but overall up 4. And then I’ll turn it to Mike.

Michael A. Shaffer

There are a couple of things going on in SG&A. As Manny mentioned and you mentioned, the move of the advertising from the fourth quarter to the third quarter is one piece. Two, we’re growing our wholesale businesses at a faster rate than our retail businesses and it does affect our SG&A in [power] segment and overall for the company. We’re expecting about a 30 -- a 40 to 50 point decline on SG&A for the year related to this shift into the wholesale because of the faster growth in the wholesale businesses.

And lastly overall, with the tough economic environment we have made some adjustments an we pull back wherever we can and we continue to look for ways to pull back on SG&A and maximize our cash.

Emily Shanks - Lehman Brothers

Great. That’s what we were looking for. And then actually if I could squeeze in just one quick one; can you give us what D&A was for the quarter?

Michael A. Shaffer

Sure. For the quarter, we were about $11.5 million.

Emily Shanks - Lehman Brothers

Great. Thank you.

Operator

Our next question comes from Sean Naughton with Piper Jaffray.

Sean Naughton - Piper Jaffray

Good morning. I have a quick question for you on how you plan -- how you are planning the sportswear segment, both from the moderate sportswear and then also on the Calvin Klein side for 2008.

Emanuel Chirico

Let me start with Calvin Klein. On the Calvin Klein side of the business, we continue to grow square footage. That’s a combination of some new doors but it’s also growing the square footage of the business. We’re planning for the Calvin Klein business to continue to grow somewhere in the 10% to 15% range on the top line, probably closer to 15% next year on the top line, so that business will continue to grow. We’re planning it aggressively and there’s really no pulling back on that at all. We haven’t been impacted on the open to buy side or whatever, so a lot of my comments about how we’re managing some of the orders and flows really deals much more with our more moderate businesses.

When you look at our more moderate businesses, our Arrow business in particular, we’re really planning that business in the first half of next year to actually be down slightly. We’re really managing inventories and managing gross margins and managing our markdown allowances. We want to get more out of the inventory that we put into there and drive more regular priced selling and less promotion and one way to do that is to manage the in-flow and the overall profitability of business. So we’re being much more focused.

We want to increase our average unit retails at the door and increase the overall profitability of that business. In a similar vein with Van Heusen and to a much lesser extent, IZOD men’s, again given the environment and where we are, we’re being very cautious as we flow inventory into the wholesale channel of distribution and we’re really trying to manage that business and manage our gross margins and manage our markdown allowances.

So given that we’re being more cautious than we would be in other years with that business as we turn into 2008 to try and improve the overall profitability of the business by -- profitability percentages by really improving the model and improving sell-throughs.

Sean Naughton - Piper Jaffray

That’s great color. Thank you. And then a question on international from the licensing side; do you expect more of your Calvin Klein licensing growth to come from obviously the international with Warnaco and potentially Coty with the fragrance side as well. Do you see that -- how fast do you see that business potentially growing? I think it’s about mid-50% of the Calvin Klein revenue today on the licensing side. And then additionally, are there any other brand opportunities for licensing going forward?

Emanuel Chirico

On Calvin Klein, you’re absolutely right. Our business is about 50% North American based, 50% internationally based -- Europe, Asia, South America. When you look at the business, we’ve been surprised with how incredibly strong the U.S. Calvin Klein business has been. We would have said that we would have expected the international business because there’s just more growth opportunity there, not the -- the brand you would say is not as developed outside the U.S. as it is in the U.S. We would have said that there was more opportunity. That hasn’t been the case through the third quarter of 2007. The growth has been pretty consistent between international and domestic.

But as we plan 2008, we’re planning for the growth to be a little bit more aggressive coming internationally, about 60% of our growth coming from international growth and about 40% of our growth coming from U.S. growth of the business.

A lot of that additional growth that we are talking about is really being driven by new markets -- India, China, some of the Asian developing markets, the Middle East, where the Calvin Klein brand is very well-known, under-developed and really has got a good foothold in those markets and seems to really be growing very well.

So that’s a sense of where we’re coming from on an international point of view. When you look at some of the new product launches, when we look at Calvin Klein, next year we’ll be launching significantly the cosmetic business. It’s a very soft launch internationally in the fourth quarter of this year but really a more significant launch next year.

In the U.S., a big piece of that launch next year with cosmetics will be with Sephora and internationally with Sephora and country by country, we’ve seen very strong growth and we feel very positive about the initial results that we’ve seen from the cosmetic launch.

On the fragrance side of the business, I can’t speak to it because it hasn’t been announced and whatever, but we have some significant new launches occurring with fragrance. We’ll have two new launches, or re-launches of current fragrances, two new launches, two major campaigns going forward next year that we think will keep the momentum in the business.

Now, when you look at the Coty business the last two years, fragrance has grown between 20% and 30% a year on a very large business. We’re in no way planning for that business to continue at that trend. It’s been -- it’s exceeded our plans and it would be imprudent to plan for that kind of growth going forward.

We’re looking for Coty in particular 5% to 7% growth overall with that category. Could that be a little conservative? Yes but overall, we think it’s prudent given the phenomenal growth that we’ve experienced with Coty.

With our jeans and underwear business, Warnaco, particularly internationally, continues to be very aggressive about that business, opening stores, both underwear and jean stores, and continuing to develop under-developed markets in Europe, in Northern Europe, and in Asia. So that business we think will continue to grow in the mid-teens range overall. So we feel good about that business as we go forward next year.

So overall, we are planning top line growth in the Calvin Klein business next year of 8% to 10% and that should drive 15% to 18% earnings growth for the year.

Sean Naughton - Piper Jaffray

Great. Thanks and best of luck for the balance of the year.

Operator

Our next question comes from Robert Drbul with Lehman Brothers.

Robert Drbul - Lehman Brothers

Good morning. Two questions for you; the first one is around your ’08 assumptions, what do you think are the biggest risks to your initial preliminary expectations for ’08, Manny? Where do you think you could have some risk in those assumptions?

Emanuel Chirico

Well, I guess -- let me stop before I fall into a trap. Let me start by saying I think there’s as much opportunity as I think there is risk. I think we’ve taken a very prudent outlook on 2008. We’re trying not to blow smoke up -- we’re trying not to give anybody a story so we’re trying to really call it the way we see it. So we think there’s as much opportunity as risk.

I think it would be disingenuous to say that I think the biggest risk is the overall environment that we are dealing with. It is a -- it’s unsettled. It’s hard to read right now because it’s happening so fast and the numbers are moving so quickly. Each day is very significant so it’s hard to get a read on it.

I think the fact that there is an extra weekend in December, it only amounts to an extra day or so but there is an extra weekend. I think the Christmas season or Christmas shopping is even going to come later than it did last year.

So I think with all that factored in, that’s my concern about -- as we go into 2008, is the consumer. I feel very comfortable with the way we’re planning the business, how we’re managing the business, that we’ve given guidance that we feel we can reach and exceed as we go forward, but the biggest risk is the consumer and the environment.

Robert Drbul - Lehman Brothers

And then with the decision to authorize a share repurchase program, can you address the M&A environment a bit in terms of opportunities or lack of opportunities in terms of where you are seeing things today and the expectations as you go forward?

Emanuel Chirico

Let me address this in two ways; we’re going to end the year with at least -- we’re going to end the year with $450 million in cash. If you were to take out the full impact of the stock buy-back, $200 million, we’re going to end the year with in excess of $250 million in cash, un-barred against our revolving credit facility, which would give us another $200 million of borrowing capacity.

So somewhere we have the capabilities based on our balance sheet to do an acquisition without having to talk to a bank and just write a check of somewhere in the neighborhood of $400 million to $450 million.

We feel in addition, I guess when you look at the environment today of doing acquisitions, sellers, both private and public, haven’t come to terms with the valuations that their companies are trading at today. If a private company, whatever the brand or the business might be, was told by a banker in June that his business was worth 10 times EBITDA, and today that business is worth 6.5 times, he is not a seller today. And what we basically see is the pipeline, there’s not a lot of deals out there. There’s not a lot of attractive acquisitions, particularly if you’re not willing to pay huge premiums for the business.

When we looked at it, we thought the best use of our capital given that acquisition environment, given where we are, and given our stock price, which I guess like every CEO I think is significantly undervalued, we think the best use of our capital is to buy back our own stock and to use it for that. So that’s how we feel about it.

Robert Drbul - Lehman Brothers

Great. Thank you. Good luck.

Operator

Our next question comes from David Glick with Buckingham Research Group.

David J. Glick - Buckingham Research Group

Good morning. Mike, I was wondering if you could get into a little more detail helping us break down the second half of ’08, because on the surface, it looks like a mid-20s growth. I think it’s a much more conservative plan than it appears. I was wondering if you can give us a little more granularity, breaking down what’s your growth rate to the extent you can, obviously, in the organic businesses, the businesses that are going to become accretive that you are investing in in the first half of the year, you know, the impact of the buy-back and the impact of the lower investment spending.

It seems like it’s maybe very low double digit organic growth when you strip out the buy-back and the decline in investment spending, so it doesn’t seem like it’s -- you know, they are assumptions that are too aggressive but I’m wondering if you could help us through that. Am I looking at that correctly? And if you could provide a little more detail.

Emanuel Chirico

I think you basically asked the question and answered it, so it was helpful from that point. I’ll turn it over to Mike in two seconds. I mean, look, we are one of the first companies to give a view of 2008 so the amount of granularity, I’ve tried to do that. Michael will give you some sense on it but everything that you said is absolutely true. The second half looks more aggressive than I think it really is when you back out the start-up, but I’ll make Mike take all that into --

Michael A. Shaffer

Just to highlight some of the points that you already brought up, the start-up costs in the first half next year, we basically don’t have start-up costs in the second half so that’s worth about $0.09 to $0.10. In addition to that, we’ve got the new businesses, the IZOD women’s and the Timberland business, which should start to contribute towards the -- in the second half.

And in addition to that, we have the impact of the share repurchase, which if you do the math is somewhere around $0.07 to $0.11 and with that, it’s going to be much -- it’s all basically weighted towards the second half of the year.

David J. Glick - Buckingham Research Group

So it sounds like half of the growth is coming out of things that are obviously very controllable.

Emanuel Chirico

I think if you look at the -- I guess if you do the math, on average we’re saying a 25% growth rate for the second half of the year. If you back out the start-up costs, if you back out the impact of the stock buy-back, if you back out the new businesses, I think the you are really looking at the businesses that -- the other businesses, the Calvin Klein licensing businesses and the dress shirts, neckwear business and our sportswear businesses, really growing somewhere in the neighborhood of 10% to 11%.

So I think it’s much more in line -- very much in line with where our growth has historically been and where we’ve been, so it’s nothing that we feel uncomfortable with as we look out to it.

The sheer numbers of it I can understand somebody says well, they’re planning 25% growth but when you pull out some of the special items, the start-up costs, the new businesses starting to contribute and eliminating losses this year, the fact that the stock buy-back is significantly more second half weighted and that we are just planning that somewhat the environment will get more ratable and we’ll be up against much more reasonable comps in the second half of the year. The first half, the first two quarters, our comp store increases in our own stores were up about -- between 4% and 6%, depending on the quarter.

And our department store business was also much more aggressive, probably driven somewhat promotionally but again much more aggressively, so we’ll have a much easier comparison as we go into the second half of the year from a sales point of view. So it gives us some comfort that we think we’re looking at it the right way and that we’re not being overly aggressive in the second half of the year.

David J. Glick - Buckingham Research Group

Thanks for that color and detail. I appreciate that. And just to follow-up on the buy-back, given the current valuation, why wouldn’t you be more aggressive than what you’ve set out in your plan? And have you or would you consider doing an accelerated stock repurchase, which would obviously give shareholders the benefit much more quickly?

Emanuel Chirico

I think we will be aggressive. At these price points, at these stock levels that [require] [inaudible], but at these levels, we will be aggressive buying the stock, whatever that means. I don’t want to commit either way how we might do that but clearly we have the ability to do whatever we’d like to do from a stock buy-back point of view.

David J. Glick - Buckingham Research Group

Great.

Emanuel Chirico

-- more aggressive, then [inaudible] benefit.

David J. Glick - Buckingham Research Group

Thanks very much and good luck, guys.

Operator

Our next question comes from Omar Saad with Credit Suisse.

Omar Saad - Credit Suisse

Thanks. Manny, can you give us a little bit of color in terms of what your economic assumptions are for next year for the environment? I don’t know if you’re looking for a soft landing or a soft landing on the back half of if you’re really baking in a near full-blown recession.

And then, could you contrast that with your sense of how your retail partners are looking at their businesses for next year and how they’re planning their businesses for next year?

Emanuel Chirico

I think we are very consistent with our retail partners. I think that the general feeling is that it’s -- look, I’m not an economist, so I’m not going to -- it’s going to be a soft landing, it’s going to be a hard landing and I’m not sure I’m smart enough to really do that.

What I think we have focused on as a company is really managing inventory, managing the flow, trying to control what we can control -- SG&A and the inventory. So what that translates into is a much slower growth in volume for the first half of the year. I can’t tell you that we’ve got a recession built into our model. We don’t. What we have is that it’s going to be a much more cautious environment and given the way our retail partners are managing their inventory, which I think is very prudent, they are being very prudent about how they are buying inventory and flowing it and I think we all -- we are all -- if business were to get better, I think we all know how to chase inventory and chase business.

This time last year, we were much more aggressive about buying inventory, positioning ourselves and we really were positioning ourselves to go after growth above and beyond what our plan might be, because we felt it was there. I think that was the way -- I think most people felt that way.

I think now, you’d be crazy to buy above what your sales expectations are, so we are being very cautious as we buy inventory and we are buying what we have commitments for and we are not taking much of a risk anywhere, and the only place we are being a little bit more aggressive on inventory is in our Calvin Klein business, because we know that there’s momentum behind [that business].

I hope that answers the question.

Omar Saad - Credit Suisse

Yes, no, thank you. And then I wanted to follow-up on a comment you made in the prepared remarks -- the Calvin Klein business obviously is performing well. You mentioned that dress shirts are performing well and that the average prices are actually going up. When you look at your portfolio and the exposure across channels into different types of customers, whether it’s lower income customers or higher income customers, how do you feel about where your portfolio is positioned and do you see differences in the spending patterns and your expectations for spending patterns across the different brands within the different price points?

Emanuel Chirico

Okay, I guess -- look, the Calvin Klein business is very strong. That’s a statement. I can’t tell you how much of that is driven by just the strength of the brand and how well we’ve executed and how much of that is because that higher end consumer spending.

I’ve seen reports that talk that the higher end consumer is under some pressure as well. I can’t give you a direct answer to that. What I can say is I think in this environment, I’m much more comfortable running a portfolio of brands as opposed to a single brand and I am much more comfortable that we attack each of those channels of distribution.

I think clearly given the price of gas, what’s going on in the world, consumer confidence, I think the more moderate consumer is under more pressure. The opening price point consumer in all channels of distribution, be it Nordstrom’s, Macy’s, JCPenney, Kohl’s, all the way down -- I think that opening price point is under more pressure.

I think private label is extremely well-positioned and promotional and if you compete with private label, even if you are 10% higher or whatever, you are feeling more of the pressure. And I think that’s why some of our more open price point brands, like Van Heusen and Arrow, are feeling more pressure and more of the pressure of price compression.

IZOD, which is more in the middle and more upper, is not feeling that same pressure. It’s dealing with the environment but it doesn’t see the same pressure. And Calvin Klein seems to be dealing very well against its competitor set. So that’s how we break out our brands and it’s a very similar story in dress shirts and neckwear, where we truly run anywhere from 15 to 20 labels from all the way at the top with Valentino in neckwear to Calvin dress shirts, Kenneth Cole -- it’s across the board and there’s winners and losers but we feel the way we have the inventory managed and how we are attacking each channel of distribution, that business, which is much more of a replenishment business, is not having as significant pressure on gross margins. I hope that answers that question.

Omar Saad - Credit Suisse

Thank you.

Operator

Our next question comes from Lee Backus with Buckingham Capital.

Lee Backus - Buckingham Research Group

Just first on the stock buy-back, when are you able to start buying back the stock?

Emanuel Chirico

Technically, we can’t -- although it was approved, because of blackouts and whatever, we probably can’t start buying until the end of this week some time. And that’s when we would start considering it.

Lee Backus - Buckingham Research Group

Is there anything that would preclude you buying back the vast majority of your stock buy-back by the end of this year?

Emanuel Chirico

No, except the vagaries in the market. There are rules and regulations. You can’t exceed X percentage of your shares, the trade -- so as long as it can be done efficiently, and there’s a lot of ways to deal with that if we so chose to be that aggressive, there’s no reason why we couldn’t be. And at these price levels, I think we would be very aggressive.

Lee Backus - Buckingham Research Group

And also, looking at the royalty revenue in an economically tough environment, I would expect there would be less volatility on the royalty revenue line, which is a pretty significant share of your earnings.

Emanuel Chirico

I think on two levels, that’s a really good callout. On two levels, is that you don’t have the gross margin exposure. I mean, if there’s selling pressure, which there might or might not be, we’re not anticipating that, particularly internationally, which is half of the business, but if you sell the product in, the nice thing about the licensing business is you get paid on sell in. You don’t get paid on gross margin and it’s the licensee’s responsibility to manage their inventory and manage their exposure. So it’s significantly less volatile from a gross margin point of view and it’s significantly less volatile from a revenue point of view.

We’ve always talked about revenue growth with Calvin Klein licensing of 9% to 11%, and given the overall environment, we’re talking about 8% to 10%, so clearly it’s got minimal or no impact on it and it should not impact that business, and that represents about 40 -- the licensing by itself represents about 40% of our overall profitability.

Lee Backus - Buckingham Research Group

Thank you.

Operator

Our next question comes from Jeff Mintz with Wedbush Morgan.

Jeff Mintz - Wedbush Morgan Securities

Thanks very much. A couple of questions on the new businesses.

Emanuel Chirico

Jeff, could you speak up?

Jeff Mintz - Wedbush Morgan Securities

Sure, not a problem. A couple of questions on the new businesses. On the IZOD women’s business, how many doors was that in for fall and what are you planning in terms of growth, both for spring and fall next year?

Emanuel Chirico

We’re in a little bit over 200 doors for fall 2007. Those doors will grow next year -- over time, those doors will grow to 400 doors. I think next year, right now we are planning about a 100 door expansion. It could exceed that as the business continues to crawl out but I think the best way to look at it is we did about $30 million for the second half of this year. Right now, we’re calling that we’ll do in excess of 60, probably closer to 65, so there could be some potential upside if we continue to perform like we are performing right now.

Jeff Mintz - Wedbush Morgan Securities

Great. And then on the Timberland business, which you are launching in the second half, what size business are you looking for there in terms of revenues? Is $30 million there as well kind of a decent first season number?

Emanuel Chirico

We talked more like 25 right now. It could be better than that. We’ll know better -- we have market week in January, a lot of things have to flush out. It’s a little premature for me to talk more specifically about that. The brand has got its issues from just a positioning point of view but we think it’s got -- it seems to be very, very well received by the market and I think they are really looking for somebody to take the brand and really grow with it. And the right product in the department store channel of distribution and specialty store business, we think it’s a real opportunity for us.

Will it all come in Fall 2008? [I don’t know] but we feel good about everything that we said against our expectations that we’ve set up for ourselves, so we think we can do better than how we’ve laid it out and we feel good about the business.

Jeff Mintz - Wedbush Morgan Securities

Okay. Thanks for that. And then just on a CapEx plan for 2008, can you talk at all about what’s going to go into it and if you can, give us some kind of a range for where the number might be on that?

Emanuel Chirico

I think we are going to be somewhere between $95 million and $110 million. Mike just wrote me a note and that’s a little bit below where we were this year.

Jeff Mintz - Wedbush Morgan Securities

Great. Thanks very much and good luck.

Operator

Our next question comes from Brad Stephens with Morgan Keegan.

Brad A. Stephens - Morgan Keegan

Good morning. Next year, I think historically you’ve talked about roughly 250 basis points of margin expansion in the CK royalty business, and approaching 50%, which by my math you’ll be somewhere in the 49% to 50% next year. So longer term, where do you think that business can go?

Emanuel Chirico

I think clearly over -- just bear with me one second. I think we are going to end this year pretty close to 49%. I think your target of adding 100 to 200 basis points next year is reasonable and I think long term, as long as the top line grows in that 9% to 11% range, we should be able to leverage against the expenses so the bottom line should grow 17% to 20% if it grows 9% to 11%. So I think that converts to about 150 basis points a year and it’s just a question of what the size would be.

I think that -- I would imagine around 55% over the next three years, 2008, 2009, and 2010 would be our goal to get close to that.

Brad A. Stephens - Morgan Keegan

All right. On the gross margin this quarter, I think it was down like 215 bps, and if you strip out the licensing it’s down 260. Given the launch of IZOD women’s, I assume that had a negative drag on it, given it’s a wholesale product. So can you break down the 260 between channel and between markdowns?

Emanuel Chirico

Sure. Just bear with me -- it’s more than just IZOD women. Our wholesale businesses -- neckwear, as well as its doing, and IZOD women’s in particular, wholesale businesses by their nature run lower gross margins and higher SG&A -- and lower SG&A expenses. Our wholesale businesses carry a higher operating income margin than our retail business overall, probably by about 200 basis points. So our wholesale businesses are overall more profitable just by the models we run and the businesses we run.

So I think if you look at the 260 basis points, probably almost half of it has to do with just mix of business and the wholesale retail. Probably about 150 basis points has to do with the fact of more promotional environment, more markdowns and where it’s coming.

We have the fourth quarter planned down also somewhere in the neighborhood of 150 to 200 basis points for the gross margin, going in with the understanding that it’s just going to be more promotional and there will be more markdowns required, both at wholesale and retail. If it’s better than that, which I think is a distinct possibility, we’ll deliver against that.

Brad A. Stephens - Morgan Keegan

All right. Thanks. Good luck.

Operator

Our next question comes from Brian McGough with Morgan Stanley.

Brian McGough - Morgan Stanley

Thanks for taking my call. Just kind of a big -- something for you, Manny, more big picture; really, we’ve seen a bunch of examples where in other licensing agreements, when times get tough like we have right now, you see a licensee that pulls back on brand investment and they print a bigger margin than they probably should. Would you just talk for a minute just about how you control your brand and how especially in times like these, you can ensure that your partners are investing in an appropriate way to drive results in ’08 and ’09?

Emanuel Chirico

That’s a great question. Our contracts require an advertising spend. It’s required advertising spend, be it 3% to 4% of sales. We factor that in. We also have a plan that is committed to up front.

The other thing is, we control the advertising spend, so if there’s -- it’s not a question of their spending the money; it’s a question of we spend the money and the only exception to that really is of significance is fragrance, where we control the total creative function and we control totally where the goods will be -- where the media is being spent. So everything has to be approved by us but they actually spend the money.

We have not seen -- the only place where there was latitude on the part of the licensee about the levels that have been spent is really in our fragrance business, where they are spending significantly more than the contractual requirements of the business. I think they are spending close to $80 million to $90 million on the marketing of the Calvin Klein fragrances around the world and I think by contract, it’s a percentage of sales that would probably translate closer to $30 million, $35 million.

So clearly the model works for them, the growth is there. They continue to invest in those businesses and we haven’t seen any of our licensees come to us to try to pull back any of their marketing spend.

Brian McGough - Morgan Stanley

Is there any kind of oversight that you have over non-marketing spend SG&A, whether it be design, merchandising, or any other kind of cost that it might take to plow a business forward?

Emanuel Chirico

Each of the businesses on a non -- beside media spend and what goes on which are required by contract, each of the contracts, of our licensing contracts have design requirements in them that require a separate design studio for the brand, a separate showroom for the brand, separate -- if there’s fashion shows, how those have to be run, all of the stores that are around the world as of the end of this fiscal year, will be operating, our licensees will be operating 400 Calvin Klein stores around the world -- sportswear, jeans, underwear and accessories. All of those stores are designed and approved by Calvin Klein, both from a design point of view, a presentation point of view, and a location point of view.

So our contracts, our licensing agreements and our licensing vendors, because of the strength of the brand, really give us tremendous control over the marketing and presentation of product around the world, and I’d like to -- hopefully you feel the same way but I would like to think that over the last three years, we’ve significantly increased our marketing spend, we’ve significant invested in the design and presentation of our product around the world and I think it shows in the results and I don’t see any reason why that will back off one iota next year or in the future.

Brian McGough - Morgan Stanley

Yeah, it’s hard to argue with that one. Anyway, thanks and best of luck.

Operator

Our next question comes from Clark [Orski] with KTP Investment Advisors.

Clark Orski - KTP Investment Advisors

Just a quick question on the guidance for next year; what tax rate are you using?

Michael A. Shaffer

We’re somewhere between 36.5% and 37% in 2008.

Clark Orski - KTP Investment Advisors

Okay, and can you tell me for the third quarter what the gross interest expense was?

Michael A. Shaffer

Sure. For the third quarter, our gross interest expense was about $8 million.

Clark Orski - KTP Investment Advisors

Thanks a lot.

Operator

Our next question comes from David Berman with Berman Capital.

David Berman - Berman Capital

I was just wondering, you guys were talking about the buy-back earlier. Obviously from a shareholder standpoint, it’s much better for us if you buy back shares personally, and I was wondering why you wouldn’t be doing that, since you sound so -- you want to be so aggressive with the company’s money, I was wondering if on a personal level, you’ll be doing that.

Emanuel Chirico

We’ve been in a blackout period now for four weeks, or three-and-a-half weeks. About five weeks ago, I personally bought stock. I can’t speak to anyone and I’m not going to speak for anyone else in the company. I personally bought stock. I continue to own stock. I have restricted stock in the company. I have stock options in the company. A substantial amount of my personal net worth is tied up in the company’s stock in one shape or for, so I think -- hopefully that speaks for itself but clearly during the third quarter, I was purchasing stock --

David Berman - Berman Capital

Yeah, but with the stock down $4 or $5 now, I mean, it obviously must be more appealing to you.

Emanuel Chirico

It certainly is more appealing to me and I will consider that as I consider everything else.

David Berman - Berman Capital

Thank you. And as far as the balance sheet is concerned, I was just wondering if you could explain to me -- I’m sorry I don’t have the Q here in front of me, so I’m just trying to understand. You’ve got an equal amount of assets, cash of $300 million plus, and debt of $400 million. Can you just -- so the net of it is -- while the net of it is a slight amount of debt, about $60 million, the net of it is $4 million interest expense because obviously interest expense is going to be greater than your interest income. So I was wondering why you have that structured like that.

Emanuel Chirico

I guess two things -- I’m not sure if your question is asking me are we under-levered or over-levered.

David Berman - Berman Capital

No, no, just -- well, first there are two things. That is one question but the other question is why is there cash -- why do you have cash when you have so much debt? Why not pay the -- I mean, is it long-term debt? Is it sort of ten year stuff that you’ve got -- what is it?

Emanuel Chirico

Okay, let me take a step back. The debt is ten-year debt and eight-year debt, first a seven-year debt. The first call data on the debt is for a chunk, a piece of it, about $150 million, is 2008 and than another 150 is quickly thereafter. So nothing is callable today by us.

Secondly, the debt was put in place and we significantly levered up the company to buy Calvin Klein four years ago, so the debt was put in place under that, so we de-levered the balance sheet, put it in position, and we’re looking at the capital structure. So our first move to really adjust the capital structure was to have a $200 million stock buy-back. As that completes and we look at our capital structure, I’ve been very consistent. Our first priority is to continue to invest in acquisitions. There don’t seem to be any in the foreseeable future and by that I mean the next six to nine months.

David Berman - Berman Capital

But if you increased the debt by $200 million, aren’t you restricting yourself from acquisitions that might come along and might be a bit bigger?

Emanuel Chirico

No, I guess -- hopefully, I thought I answered this before, is this will -- you know, our balance sheet is significantly under-levered. So point one is if there is a very large acquisition, $1 billion or $2 billion, clearly the capital markets are available to us to go to both from a debt point of view, because we are significantly under-leveraged and we think we have a lot of flexibility to do a deal.

As far as a deal like a bolt-on acquisition, like we did with Arrow, which was about a $75 million acquisition, Superba, which is about $125 million all-in acquisition, IZOD, which was about $150 million acquisition -- those kinds of acquisitions we can definitely do and continue to do as cash. We can continue to do licensing arrangements.

So we will actually, without any additional cash flow coming into the company, and if we were to [pro forma] and take the whole $200 million out, we would be left with $250 million in cash and a borrowing capacity against our revolving credit facility, which is totally unutilized from a borrowing point of view of about another $200 million to $250 million.

So we think over the next 12 months, we’ve got capacity to do an acquisition of $400 million to $500 million without having to go to the credit markets, without having to go to any of --

David Berman - Berman Capital

Right, and still do your $200 million buy-back, correct?

Emanuel Chirico

And have the $200 million buy-back complete, and this time next year, as we said we would continually do, we’ll look at our capital structures again --

David Berman - Berman Capital

So to Lee’s question from earlier, when do you think you’ll be finished with your buy-back?

Emanuel Chirico

I think it’s -- who knows. We’ve committed to get it done within the next 12 to 15 months, to get it done by December 2008. The only thing that would stop us from doing that would be an acquisition that would come up in the very near term that would be very appealing to us.

Absent that, I think given these price positions, I can’t say it anymore aggressively, at these price points, I think we’re going to be aggressive buyers of the stock --

David Berman - Berman Capital

In this environment, quite a few retailers are waiting, just given that they want to see if the environment improves. You’re not worried about that?

Emanuel Chirico

From a stock point of view? No, I guess a couple of things. I think our capital structure is very strong. Even with -- however anyone looks at the financial performance, on every level our growth this year, earnings per share is over 20%. Next year even, we’re -- where we are trying to be prudent and conservative, we’re still looking at growth that’s around 15%.

So given our prospects, given our capital structure, I think it’s appropriate for us to be somewhat aggressive with our capital structure and --

David Berman - Berman Capital

Right, and the last question related to that is that you are looking at $3.60 for next year, and that’s taking into account the reduction of shares to 2 million shares. What does that -- how much of the $3.60 is from the accretion from the buy-back?

Emanuel Chirico

I think we are talking about 6 to 11 -- the estimate that’s in the numbers, $0.06 to $0.11 a share.

David Berman - Berman Capital

Six to eleven cents a share?

Emanuel Chirico

Absent that, probably the organic growth of the business is 10% to 12%.

David Berman - Berman Capital

Right, and the 2 million to 3 million shares would be, I guess if you take 3 million shares at today’s price, you are looking at -- it’s about $120 million worth, so you are just assuming $120 million worth of --

Emanuel Chirico

No, I’m not. I guess the way the earnings per share calculation works, it’s a weighted average so if you complete it ratably and you buy back all $200 million dollars worth of the stock, ratably over the next 12 months, it’s the average of what’s outstanding --

David Berman - Berman Capital

No, that I understand but I’m curious -- okay then, in another way, on a full-year basis, what is it? Is it $0.12, the accretion on a full-year basis?

Emanuel Chirico

Assuming that it would be 3 million shares, it’s $0.11. Assuming that it was 2 million shares, it would be $0.07. Four million shares would be $0.15. And it’s all about what price we buy it back, when we buy it and how aggressively we buy it.

David Berman - Berman Capital

Yeah, I understand. But it’s actually interesting that it’s helping you to [dispute] over $0.11 or $0.12 a share on a permanent basis, correct?

Emanuel Chirico

Yes.

David Berman - Berman Capital

But yet if you play it as a one-time dividend, you’d be getting $2.15. So wouldn’t that be better for shareholders to get $2.15 than to get $0.10, $0.12 of earnings accretion?

Emanuel Chirico

I think $0.10 to $0.12 is a partial year. A full year would be $0.15 accretion at a multiple, depending whatever multiple you decide to use. It’s really a question of how you think the stock performance. We believe in the performance and we think it’s better for our shareholders to increase their ownership in the company by taking shares off the market and we think that has a longer term benefit than a one-time payment of capital back to --

David Berman - Berman Capital

Right, no it’s an interesting discussion because I guess at an 11 multiple, which is what you are at today, $0.15 is $1.65 on present value and the dividend would be $2.15.

Emanuel Chirico

That is an interesting calculation. Six months ago at a 20% multiple, which we were trading at, I think you get a lot different --

David Berman - Berman Capital

Right, a very different answer. That’s right. Exactly.

Emanuel Chirico

I don’t think we can -- the vagaries in the market, I don’t think we consider ourselves a 10 or 11 times --

David Berman - Berman Capital

No, no, I’m understanding you but an investor could certainly get the $2.14 per se and put it back into the company, if that’s how you felt. And then you’d get that appreciation of multiple in any case.

Emanuel Chirico

So I guess taking what you said, the management team of this company feels very comfortable about the growth prospects, the long-term growth prospects of the company. We think it’s much better to invest that money in share buy-back than a one-time dividend that goes away.

David Berman - Berman Capital

Well, it doesn’t go away. It goes into the pockets of all the shareholders.

Emanuel Chirico

Yes, it’s a one-time, and then it doesn’t continue -- that’s not a permanent benefit. It’s a one-time benefit so we think it’s more efficient to do it that way.

David Berman - Berman Capital

Thank you very much. I appreciate you taking the time to go through that. Thanks a lot.

Emanuel Chirico

Thank you.

Operator

We have no further questions at this time. I would like to turn the conference back over for any additional or closing remarks.

Emanuel Chirico

Well, thank you very much. We look forward to speaking with you on our fourth quarter earnings release, probably in the end of March and have a very nice day. Take care.

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