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Phillips-Van Heusen Corporation (NYSE:PVH)

F4Q07 Earnings Call

March 25, 2008 11:00 am ET

Executives

Emanuel Chirico - Chief Executive Officer, Director

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

Allen E. Sirkin - President, Chief Operating Officer

Pamela N. Hootkin - Senior Vice President, Treasurer and Investor Relations

Analysts

Jennifer Black - Jennifer Black & Associates

Jeffrey Klinefelter - Piper Jaffray

Jeffrey B. Edelman - UBS

Robert Drbul - Lehman Brothers

Kate McShane - Citigroup

Emily Shanks - Lehman Brothers

Carla Cassella - J.P. Morgan

Brad A. Stephens - Morgan Keegan

Jeff Mintz - Wedbush Morgan Securities

Susan R. Sansbury - Miller Tabak & Co.

Andrew Byrd - Post Advisory Group

David J. Glick - Buckingham Research Group

Clark Orski - KTP Investment Advisors

Operator

Good day, everyone and welcome to today’s Phillips-Van Heusen Corporation’s fourth quarter 2007 year-end earnings release conference call. This webcast and conference call is being recorded on behalf of PVH and consists of copyrighted material. It may not be recorded, reproduced, retransmitted, rebroadcast, downloaded or otherwise used without PVH’s express written permission. Your participation in the question-and-answer session 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 March 25, 2008. 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 at this time for opening remarks and introductions, I would like to turn the call over to the Chairman and CEO, Mr. Manny Chirico. Please go ahead, sir.

Emanuel Chirico

Thank you very much. Good morning, everyone. Joining me on the call are Allen Sirkin our President and Chief Operating Officer; Mike Shaffer, our Chief Financial Officer; and Pam Hootkin, our Treasurer and Director of Investor Relations.

We are quite pleased with our fourth quarter results, particularly given the difficult macro retail environment that we are dealing with. I am going to try to talk about all our businesses performance in the fourth quarter. Let me start with our Calvin Klein licensing business. It was another very strong quarter for Calvin Klein. We posted a 14% increase in royalty revenues in the quarter and our operating earnings were up just about 37%.

The growth on the top line came from international principally. Our international business grew about 20% in licensing while our domestic business grew about 5%. When you look at the breakouts for the year of our Calvin Klein licensing business, a little bit over 55% of our revenues are coming from outside the United States, principally the far east and Asia and Europe, and about 45% of our revenues are coming domestically in the U.S.

The components of the business, our fragrance business continued its strong performance. Royalty revenues were up about 20% in the fourth quarter. The launch of Man, which was in the third quarter of the year, continued very strong for Calvin Klein. We continued to have very strong business in their Euphoria franchise. That business just continues to exceed our expectations.

The CK N2U business, particularly international, continues to go very strong and that business by the end of 2007 was over $130 million in volume for the CK N2U business, so substantially ahead of all of our expectations in fragrance and we are up against a very strong business as we go into 2008 with a lot of momentum behind us.

Our next largest licensee, [inaudible], for underwear posted about a 20%-plus increase in royalties for the quarter. The launch of Steel, which was in the third quarter of the year, continued very strong performance, sell-in and sell-throughs. The marketing campaign was amazing with John Hudson. That business just has continued to be very strong for us and is a new component for us.

We continue to have good growth on the women’s side of the business with our Perfectly Fit business. The bra business continues to grow. The business in the United States grew about 10%. Internationally, it grew about 30%. The international growth was fueled by the new product initiatives and coupled with the continued expansion of retail stores throughout Asia and Europe, so our underwear business, another very strong performance.

The jeans business had a very good quarter for us overall. Internationally our jeans business grew, Asia and Europe by over 20%, while our business in the U.S. was relatively flat, up 2% or 3%. But again, for the jeans business, a very mature business. It had very strong performance.

One of our other large licensees, G3, continues to do an outstanding job for us. We had very strong performance in outerwear. For the year, that category was up in the 20% range. Also the women’s suit business has been very profitable for us and dresses, which launched in 2006 and we have our first full year in 2007, did extremely well and overall, G3’s business is up over 30% for us. So we had great performance coming out of G3.

Let me move on to some of our other businesses. Our dress furnishings business -- dress shirts had another very strong quarter and year, both from a sales and a gross margin point of view. The business continued to run ahead on the sales plan. At retail, our average unit retails are considerably higher than last year, which has improved overall operating margins for us for the year. we’ve had increased profitability for the year as well in dress shirts and that business has continued even in this difficult environment, continue to outperform.

Neckwear for us has been a similar story. Our Superba acquisition for the year exceeded our expectations. The business is running well ahead of all of our initial plans. The acquisition has contributed, after interest expense, about $12 million in pretax earnings, or $0.13, which is much higher than our initial estimates, so our neckwear business overall, very healthy, very strong. Overall dress furnishings business, not seeming to be impacted at all by what’s going on in the environment.

Our Calvin Klein men’s sportswear business, that’s been a real home run for us. We finished well ahead of last year and on plan for the year. The business is well over $100 million in very profitable sales for us. At department stores, Calvin continues to be one of the best performing men’s collection sportswear businesses. When you look at productivity from a sales per square foot basis and a maintain gross margin basis for our retail customers, the business continues to outperform the competition. We are doing very well there.

On the retail side of Calvin Klein, our outlet business had another very strong profitable quarter. Comps for the fourth quarter ran at 8% positive and that was well ahead of our plans and well ahead of anything that’s going on in the industry, so that business contributed substantially to us.

On the new side of the business, our IZOD women’s business launched very successfully. The business for the second half of the year once we started to ship shipped over $30 million in sales, and we are estimating that next year we’ll be at least $60 million in sales for 2008.

We’ve experienced very strong sell-ins. Sell-throughs have been very good and we are basically on or slightly behind sales and margin plans at retail, which really is much better than what’s going on in the industry overall, so that business continues to exceed where we thought we would be and is doing extremely well.

The two businesses which really have been more negatively impacted by the environment are our moderate legacy wholesale sportswear business and our moderate legacy outlet store business. Our moderate brands -- Van Heusen, Arrow, and Bass, and to a limited extent, IZOD, were impacted in the fourth quarter. We really saw price compression there and additional promotional allowances and markdowns in order to right-size inventories. Just to put it into perspective, all of our customer accounts and our retail stores were planning for comp store increases at retail, somewhere in the neighborhood of plus 3% to plus 4%. Actual results, as you know, at customer retail were closer to minus 3% to minus 5% for the fourth quarter. So clearly there was a lot of promotion, a need to clear inventory.

Fourth quarter margins for both of these two businesses were down about 150 basis points as we needed to provide markdowns to get the inventories in the right position, clean as we come into 2008. I am very comfortable with the quality of our inventory as we come into 2008. We are positioned exactly where we want. There’s not much Fall inventory left, much less of a percentage as we came into February than at this time last year, so we feel good about this. Fourth quarter comps in our moderate outlet store businesses were down about 2% overall.

From a marketing point of view, just to put it into perspective, we continued to invest heavily in our brands for the year. Calvin Klein, IZOD, Van Heusen and Arrow -- all of those had very strong marketing programs. Our 2007 advertising expense for those brands was up about $20 million for the year to just over $150 million, so in a very strong performance, financial performance for us, we’ve managed to continue to invest heavily in our brands.

All of our brands have a very strong, multi-dimensional media marketing campaigns planned for 2008 and our budgets are planned to be up slightly on a dollar basis compared to 2007 levels as we go into 2008.

What I’d like to do now is turn it over to Mike Shaffer, our Chief Financial Officer, to quantify the fourth quarter results, to give some more insight into the guidance that we are giving for 2008 and really break down some of the numbers. I know everyone’s got some real focus on that. And then when he finishes with that, I would like to come back on and give some color to how we are viewing 2008 and how we are positioning ourselves going forward.

With that, I’m going to turn it over to Mike.

Michael A. Shaffer

Thanks, Manny. I’m going to start with an overview on 2007. Total revenues grew 5% in the fourth quarter to $585 million. Our Calvin Klein licensing business registered growth of 14%, fueled by new and existing licenses. Our combined wholesale and retail business revenues were up 4%, reflecting strong performance in our Calvin Klein outlet business, which posted an 8% comp-store increase for the quarter, and strong performance in our dress furnishings business, which was up 16% for the quarter, driven by the acquisition of Superba.

In contrast to the Calvin Klein outlet comps, legacy comps were minus 1% and reflected heavy promotional selling for the quarter. Our sportswear division registered a 6% sales increase for the quarter as a result of the Calvin Klein sportswear business and the new IZOD women’s business which was taken in-house in 2007 and started shipping for Fall 2007.

Our earnings per share was $0.55 for the quarter, up 17% for the entire year and $0.02 better than consensus estimate. The Calvin Klein licensing business EBIT grew 37% over the prior year and was the primary driver of the earnings improvement. Also benefiting EBIT for the quarter was the acquisition of Superba, which we completed in January of last year and strong performance in our Calvin Klein outlet business.

Partially offsetting these gains was heavy promotional selling in our legacy outlet sportswear division. Our overall gross margin on sales was down about 70 basis points which reflects this promotional environment.

On the balance sheet, our inventories are very clean and on plan with a 13% increase over last year’s levels. The growth in our inventory is to support our new businesses, Calvin Klein wholesale collection, IZOD women’s sportswear, and Calvin Klein specialty retail. Inventory excluding our new businesses were up 4% over last year.

I’m now going to move on to the full year 2008 and just give a brief overview. As we look forward to 2008, we are planning our earnings per share to be $3.30 to $3.40. Our revenues are projected to grow 7% to 8% for the full year. Our full year earnings per share guidance reflects start-up costs associated with the Timberland men’s sportswear and Calvin Klein retail specialty business of about $10 million, all in the first half of 2008. This is in contrast to 2007 where the bulk of the start-up costs were incurred in the second half of the year.

I am going to try to lay out some of the key assumptions embedded in our guidance for 2008. In general, we are being more conservative with our assumptions for our legacy brand wholesale sportswear and legacy retail outlet businesses, which have been impacted by the current sluggish environment. We continue to project strong growth for our Calvin Klein businesses, which has not seen any slowdown in performance.

Our overall revenue growth for 2008 is 7% to 8%. Calvin Klein licensing revenues are projected to grow about 10% over the prior year, with earnings planned to grow at about 15% to 17%.

Our wholesale apparel and retail revenues are planned to grow at 6% to 7%, fueled primarily by new businesses. Our full year comp store assumptions, our Calvin Klein comps will grow by 5% for the full year while our legacy store comps will decline by 2% to 3% for the year. Combined total store comps are planned to decline 1% to 2% for the year.

The earnings for the combined wholesale apparel and retail division are planned to show operating margin declines of about 150 to 200 basis points.

Now I wanted to take a step back and just give some insight into the changes between our previous guidance and our current guidance. The biggest change is that we’ve taken a more conservative view on 2008 for our legacy wholesale and outlet businesses. We’ve raised our -- we have revised our revenues for our legacy businesses down $50 million. This $50 million reduction was the result of reducing our estimate sportswear sales by $35 million as we right-size the moderate components of this business.

We’ve also revised our outlet store revenues down $35 million, as a result of our revise comp store assumptions for 2008. Partially offsetting these downward revisions was an increase in sales of $20 million for our dress furnishings and IZOD women’s businesses.

The EBIT impact of this $50 million reduction in legacy business revenues equates to about $20 million. In addition to the legacy business revisions, we’ve also reflected our recent acquisition of the Calvin Klein collection business at $25 million in revenues and no profitability.

Now I’ll move on to the current guidance for the first quarter. We are estimating EPS of $0.86 to $0.88; revenues are planned at $615 million to $625 million, a 4% to 6% increase over the prior year. Our revenue and earnings guidance reflects our cautious view of the environment with our wholesale apparel and retail business up a combined 2% to 4%, driven primarily by new businesses.

Our Calvin Klein comps are planned up 5% and our legacy comps are planned at minus 5% for a first quarter total comp of minus 3%. The first quarter also reflects $5 million in start-up costs associated with new businesses.

Lastly, our tax rate for the year is estimated at 36.5% to 37%. However, as with last year, we expect some quarterly shifts driven by discreet tax items. Based on the anticipated timing of these discreet events, we are expecting our first quarter tax rate to approximate 38.5% to 38.7% as a result of these certain discreet items.

And now I’m going to turn it back to our CEO, Manny Chirico.

Emanuel Chirico

Thanks, Mike. I just wanted to try to put the -- each of the business units in perspective as we are projecting 2008. Before I get into that, the direction we really wanted to come out with was numbers that we can put out there that we were comfortable with and hopefully that we can exceed as we go forward. And as we look at each component of our business, I’m going to just share with you the opportunities and if there are any risks.

On the Calvin Klein licensing business, we are currently projecting with our current estimate growth on the top line of about 10% and growth on the bottom line in that business of 15% to 17%. The current trend in that business is closer to 13% to 15% top line growth, principally driven by strong growth internationally that’s going on both in our jeans, underwear, and fragrance business.

We believe therefore that there is an upside against our 2008 projections if the trends continue in the business as they are right now.

On our CK, our Calvin Klein wholesale businesses and retail business that we operate ourselves, our sportswear, dress shirt, neckwear and our outlet store businesses, these businesses continue to outperform the competition, both on a sales and a margin point of view. We think there is opportunity in these businesses as we go forward.

Our comp-store sales plan for Calvin Klein is 5% for the first quarter and the year and our comp-store trend currently is running at over 10% for that business. So clearly we believe that all components of the Calvin Klein business have upside against the estimate that we put out there, given the current trends in business.

Our dress furnishing businesses continue to perform. We are very comfortable given the current sales trends in that business that we have these businesses planned appropriately at about 5% sales growth. Both our neckwear and dress shirt businesses our outperforming overall department store sales trends and as such, we are comfortable with the projections that we’ve given there.

As Mike said, we’ve reduced our sales projections at our wholesale sportswear businesses by about $35 million. We believe this fully considers the tightening of our customers open to buy. We believe that these overall sales reductions have right-sized the businesses so that we are currently aligned with our revised estimates of our customers [for their] sales trends for 2008.

We also believe that our projected lower inventory levels at retail during the year should provide for improved gross margin performance, particularly in the second half of the year. This gross margin opportunity has not been fully incorporated into our second half projections and as such, we believe we have the potential to exceed the expectations in earnings guidance that we’ve given for the sportswear business that we operate.

The business that’s been under the most pressure for us over the last two months has been our moderate legacy outlet store business. We are currently projecting first quarter comps at about minus 5% and the balance of the year is projected at between minus 2% to minus 3%. Our current sales trends are running slightly behind these estimates. We believe any sales and profit risk to this business will be more than offset by the upside opportunity in our Calvin Klein business.

And with that, I’d like to open it up for any questions that we might have from the audience.

Question-and-Answer Session

Operator

(Operator Instructions) We’ll go first to Jennifer Black with Jennifer Black & Associates.

Jennifer Black - Jennifer Black & Associates

Good morning. Manny, I have two questions; I wondered if you could talk about are you seeing a big difference regionally with any of your channels of distribution? And then secondly, can you give us a little more color on the outlet business as far as you see the big picture with the consumer? Thank you.

Emanuel Chirico

Sure. Let me start with the outlet store business. The sense we have, and from what we see from some of the [inaudible] results and some competitive analysis that we have is comps are running negative. It seems like the more moderate brands in the outlet environment are under much more pressure and it seems like the higher end brands, internationally regarded brands, are doing much better.

In certain parts of the country, we find the international tourist being very strong and the strength of the Euro and some of the Asian currencies we think is playing into that and we are seeing strong performance in those vacation destination areas, particularly in our Calvin Klein business. So the outlet business I think is feeling the pressure, particularly at the moderate area where we would expect. I think that’s pretty consistent with what we are seeing across the board.

We believe in all channels of distribution we’ve been very aggressive in the fourth quarter to get our stock to sales levels in line, so we are seeing very profitable selling as we go forward. We find that our sales trends are in line with our retailers’ sales plans, particularly in the sportswear businesses and so -- although we might be planning those businesses negative against last year in certain cases, they are still running on or ahead of plan, so we continue to be right where we think we should be and hopefully will be in a much more profitable situation with our sportswear brands as we go forward.

From a channel and distribution point of view, I think as you would expect, I think the more moderate department stores are feeling more of the pressure that I can see than at the higher end of our businesses than some of our customers.

Jennifer Black - Jennifer Black & Associates

Okay. Thank you very much.

Operator

We’ll go next to Jeffrey Klinefelter with Piper Jaffray.

Jeffrey Klinefelter - Piper Jaffray

Yes, just a couple of questions for you, Manny. First of all, on the Timberland launch for the second half, given the weakness some of the department stores, what is the most current read on that launch in terms of what they are willing to except, or what they are willing to give you for floor space and how you think the inventory build is going to go?

And then secondly on IZOD and JC Penny and your business overall with Penny’s -- given -- we know that there was some space changes when American Living went into the stores and now that it’s been in the stores and been promoted, American Living has for a few weeks -- can you give us a read on how that is affecting the IZOD and Van Heusen brands?

Emanuel Chirico

Let me start with Timberland. We are very happy with the reaction that we’ve gotten with Timberland in the market. When we showed the line in January and then we showed it at magic, the reception has been very strong. We will be in 300-plus doors across the country. The shops have been approved and are going in and that’s moving forward, so we will be in really good shape there. The business is on plan. We will do somewhere in the neighborhood of $25 million plus for a partial year.

We are very excited about with Timberland is doing with the brand. Their marketing program in the fourth quarter was very exciting. What they’ve done in certain key markets from an advertising point of view and positioning, I think they’ve really done some extraordinary things there.

I believe that they are continuing that investment as they go forward into 2008. We are working very closely with them on the launch and the advertising associated with it and the marketing, so that’s been really -- there’s been no slowdown that we’ve seen on Timberland and we haven’t had any problem with the open to buy and I think there’s been some disruption there and some open space for us that we’ve really been able to take advantage of in the department stores with the Timberland brand.

On the IZOD, we’ve moved on the sportswear side, the positioning in the stores we believe has really gotten better. We believe our positioning is usually front and center. JC Penny is a great partner for us and we’ve really -- whatever minor, and I do use the word minor, contraction we’ve seen in open to buy has as much to do with the environment as opposed to any new product launches that they have in there. The IZOD business and as well as the Van Heusen business for them is key as they go forward and we are feeling really good about that. Our business is running pretty close to plan with them and we’ve got a very healthy -- both Van Heusen and IZOD business with JC Penny, so we are very happy with where that’s going.

Jeffrey Klinefelter - Piper Jaffray

Okay, just one other, Manny, if I could; the international business has been strong for you through your CK license businesses and clearly continues to be. How much visibility do you think you have into those businesses through your partners, licensing partners? Is there some concern that the European economies are starting to wind down a little bit following the U.S.? And given that’s been where most of your growth has come from, how do you view that?

And just one other side question on that -- you know, a lot of people do ask at what point would you consider buying back your license, for example, from Warnaco? I’m just curious on how you’ve been answering that as investors are asking you the same thing.

Emanuel Chirico

Okay, let me take it in steps. The international business for us has gotten very strong and over the last three years, it’s as strong as growth has been, our international growth has been more significant. At Calvin Klein, I think I mentioned that over 55% of our revenues and profits are driven from international. And we are expecting the growth in 2008 international to be closer to 14% to 15% where domestic is being planned closer to 5%, and get to our overall 10% growth for Calvin Klein.

You know, from my discussions with all of our licensing partners and the sales plans that they have given us, which were updated as recently as three or four weeks ago, no one sees any slowdown in the Calvin Klein international business. I can’t make a statement of what’s going on with the international economies. I can only talk about the Calvin Klein business internationally, so we don’t -- we don’t see any slowdown in that business at all. In fact, the sales trends in February that we’ve gotten reports are well ahead of what was projected for February from our licensing partners, so we feel very good about the Calvin Klein international business and how that growth goes forward.

You know, on the bringing back licenses and what we would do with that business, that’s a long-term approach to the business. We like the licensing model as it is structured. We like the profitability that it brings us with a royalty rate that’s anywhere from 7% to 8%, an advertising contribution and PR contribution that’s at least 3% to 4% of their sales, so it’s a really good model for us. It allows us to control the overall business and you know, today for the first time, we are disclosing that international profitability for us represents about 25% of our total profitability and that -- you know, if you were to go back four years ago, our international profitability wouldn’t even register. So clearly we enjoy that flow of revenue and that’s a much healthier business today, given the strength of the currencies and given the strength of the economies. And particularly our Asian business is even stronger than our European business.

Jeffrey Klinefelter - Piper Jaffray

Thank you.

Operator

Your next question comes from Jeffrey Edelman with UBS.

Jeffrey B. Edelman - UBS

Thank you. Good morning. Manny, my first question has to do with the back half of the year. You did take down your sales guidance for the wholesale business. How much of that is typically replenishment? And if we are looking at pluses and minuses in terms of where we might see some upside, does that represent much?

Emanuel Chirico

Well, let me take it in pieces, Jeff. When you look at our wholesale domestic businesses, our dress shirt business is over 75% of it -- 75% to 80% of it is EDI replenishment. And what’s helpful about -- what’s clearly -- what we’ve clearly enjoyed there is that business has continued to be strong, inventories were always in very good shape there. We were able to continue to feed that business into the fourth quarter and as we’ve gone into the first quarter of this year. So that business remains healthy.

Neckwear is a very similar business to dress shirt. A lot of reorder. We have fashion deliveries of neckwear 11 to 12 times a year, so that’s a quick turning business. It goes in and out and we keep that inventory very clean and it’s a short cycle business.

On our sportswear business, I would say about 30% to 35% of that business is EDI replenishment. Things like the IZOD PK Knit, we’ve got a big pants business in IZOD and Van Heusen, a large short business. So we have inventory to support those businesses and we get behind them. We’re not particularly planning those businesses what I would call aggressively for the first half of the year. We’ll have a read on business. We don’t want to get any problems with inventory and we can quickly get behind those inventories if we start to see a change in sales trends.

So I would say to you we would be able to capture in dress furnishings almost any kind of sales trajectory that would come through if it started speed -- an upstart, an upswing. And on the sportswear business, on the EDI side, within 30 days we’d be able to get back into business there, so we are usually pretty good with managing that.

Jeffrey B. Edelman - UBS

Okay, thank you. And then secondly on the follow-up question to bringing in additional licenses in-house, if I’m not mistaken, isn’t this year a critical point for the Calvin Klein women’s business? The better business that [inaudible]? I know that had not been doing well and obviously it’s a private company now but would you share some thoughts there?

Emanuel Chirico

Yes, let me put it in pieces. There is no triggering event in 2008. The next triggering event would be in 2000 and -- three years, three to four years from now. I believe it’s four years from today. The business has been the one licensed business that we are not happy with the performance from a sales point of view. We believe the product has been significantly improved. We believe their presentation at retail, their shops are very -- are done very appropriately for the brand. We don’t believe it’s at all negatively impacting the brand overall. We just believe we’re missing a great opportunity in women’s.

The women’s business is about half the size of the men’s sportswear business in the United States and we would expect it to be just the opposite. So it’s an opportunity for us. We’ve decided, given the environment that we are in, it’s not a business that we’d like to bring back in-house in the short-term -- and by that I mean the next two to four years. But on a long-term basis, if there’s not an improvement in performance we would look at the opportunities as we go forward. The business is being planned as we go forward just based on minimum guaranteed royalties based on the license agreement, so there’s no risk based on the projections.

So it just was not something given the numerous initiatives that we have going on for growth in the company today going on that we wanted to take on another business at this time.

Jeffrey B. Edelman - UBS

Great. Thank you.

Operator

We’ll go next to Robert Drbul with Lehman Brothers.

Robert Drbul - Lehman Brothers

Good morning. A couple of questions; first, on the Calvin business, in terms of the collection business, how are you planning that for 2008 in terms of your ability to make some progress on the profitability side?

Emanuel Chirico

We are planning the business at a break-even to small loss for 2008. The way the business -- you know, inventory clearly has been more or less purchased and secured for a portion of the year. We believe we’ll have impact on the operations of the business going forward in positioning ourselves for 2009 but we don’t believe we’re going to have a significant impact on the top line in 2008 and we don’t believe we’re going to have a significant impact on initial gross margins going -- so we are planning that business I think realistically. It’s a business that we don’t plan to be overly profitable. It’s really there as a halo for the brand and we are planning it at a small loss right now.

Robert Drbul - Lehman Brothers

Okay, and then a question for Mike -- when you look at the second half of ’08 versus the actual from 2007, what sort of levels of markdowns are you assuming in the business, given the higher levels that you experienced in 2007?

Michael A. Shaffer

You know, Bob, when we look at it, we’re talking -- on the entirety of the wholesale business, we’re probably looking about 100 basis points, 50 to 100 basis points of decline.

Robert Drbul - Lehman Brothers

Okay, and then one final question just on the inventory levels -- if you broke down inventory on wholesale versus retail, your retail stores at the end of the quarter, can you maybe give us that level of granularity?

Michael A. Shaffer

For the end of the fourth quarter?

Robert Drbul - Lehman Brothers

Yes.

Michael A. Shaffer

In terms of retail versus wholesale for the end of the fourth quarter we were about 50-50. It tends to peak more for retail at the end of the third quarter as we build for the holiday season but by year-end, it comes back in line to about a 50-50 split.

Robert Drbul - Lehman Brothers

Okay. Thank you very much.

Operator

We’ll go next to Kate McShane with Citigroup.

Kate McShane - Citigroup

Good morning. Thank you. With your guidance of operating margins down 150 to 200 basis points, I guess this is a follow-up to the previous question on markdowns -- can you go into more detail about how much is this decline from markdown pressure, higher sourcing costs, the opening of Calvin Klein stores, and the Timberland men’s business?

Emanuel Chirico

I guess a couple of things. We are seeing cost increases in the back half of the year of somewhere in the 1% to 3% range. We’ve also had selling price increases to our retail partners and the key will be how sell-throughs are and what the average unit retail actually is at the door. So we are seeing modest selling cost increases in 2008 for the second half of the year and that’s been factored into the numbers.

We’ve also for the first half of the year, we’ve planned aggressively for markdowns and allowance exposure. On the allowance side, we think given the right-sizing of the inventories and the open to buy and our initial performances that we’ve seen out of the box, we don’t expect to see much -- either improvement or decline on the wholesale side because basically most of those businesses, particularly Calvin businesses, are performing at or in excess of plan and average unit retails have held in there pretty strongly.

In our outlet store business, the Calvin business is just fine and there’s actually upside in that business. The exposure would be on I think if we have -- the risk we have is in our legacy retail businesses. We are planning for additional markdowns in those businesses and have tried to keep the inventories in line.

I think we’ll -- the inventory from a quality point of view is just fine. We came out of the -- very limited on Fall and Winter product as we came out of 2007. But given the sales trends that we were anticipating against what’s actually happened, we were probably buying into -- you know, legacy business is a plus 1% comp store increase and we are running sales trends. And we’ve factored those margins into the business.

So overall, given mix of business, Calvin Klein business is growing faster with higher overall gross margins, legacy business is being planned down -- overall when we look at the year, we are planning for about 50 to 70 basis point decline in overall gross margin as we go forward. That’s a combination of allowances, markdowns, and some selling -- cost pressure factored into it.

Kate McShane - Citigroup

Okay, thanks and one other question, please, if you could; could you update us on the Calvin Klein specialty store opening plans for 2008? Is that still on track?

Emanuel Chirico

Yes, we are exactly on track. We will open -- we’ve opened five stores in 2005. We will open -- sorry, five stores in 2007. They opened later than we had hoped, just getting the real estate to be released and the stores built on time. We are planning the next five stores for the -- basically most of them will be open in the second quarter of 2008. The locations have been -- leases have been signed. Three of the locations are in California and actually in malls, one’s in Miami in the Aventura Center and the last one is in Las Vegas in Caesar’s. So we are really excited about the locations. They are even stronger locations than we had last year. So we are feeling positive about those businesses from a brand point of view and we think we will be on sales trend for those businesses going forward.

Kate McShane - Citigroup

Thank you.

Operator

We’ll go next to Emily Shanks with Lehman Brothers.

Emily Shanks - Lehman Brothers

Good morning. I wanted to see if you could just give us a little bit of color around your view of the dress shirts performance. Do you think that the whole sub-sector is continuing to grow or do you think that you are taking market share? And then if you could just update us on what your view of your own market share is in that sub-sector.

Emanuel Chirico

Sure. I’m going to -- Allen Sirkin is here. I’m going to give Allen the dress shirt discussion.

Allen E. Sirkin

We are very pleased with our dress shirt performance over the last year. We don’t see the category growing. We believe it’s a flat growth category. We believe that we are outperforming the competition. We believe that the good controls that we instituted last year helped us execute higher AURs and slight share of market growth. If you merge all of the channels together, we own about a 37.5% share of market and in the context of department store and mid-channel, all channels combined together in the department store sector, we have the number one, two, three, and four brands from a share of market standpoint -- Van Heusen, Arrow, Geoffrey Beene, and Bass, significantly ahead of our competition and all of our brands seem to be performing extremely well.

We have the strong moderate position covered and we have the strong upscale position covered with Calvin Klein and Kenneth Cole. We have outstanding performance on the Trump line and some of the other niche brands that we are running.

We are currently now launching DKNY for -- this will be our first full year. We introduced it right around holiday time, so we feel pretty good about our dress shirt position. It is not a share of market gain but we’ve got good opportunities going forward into ’08. Year-to-date, we are operating at about a 10% comp performance, which is certainly outperforming the competition and looks like this category is being treated one that -- you know, people that want to look good, dress up, it’s easier to get a shirt and tie than it is maybe to spend $300, $400 for a suit.

Emily Shanks - Lehman Brothers

Interesting. That’s really helpful. Thank you.

Operator

We’ll go next to Carla Cassella with J.P. Morgan.

Carla Cassella - J.P. Morgan

Two questions, one on -- could you talk a bit about any changes you are seeing in sourcing costs and where your -- if you are changing any of where you are sourcing from?

Emanuel Chirico

Carla, as far as our sourcing plan, we always treat that business -- I guess on balance, we are big sourcers and we are big sourcers in China but as a percentage of our business, it’s probably close to a little bit over 20% of our business. I think other people have been more aggressive in that business.

As we go into 2008, we are probably -- the 22% will probably become closer to 18% of our total sourcing mix, so we are pulling away a little bit from China. That’s based on some of the disruption that’s going on in China, some of the cost increases that’s going on in China. So we are just -- we’re managing that as we go forward.

You know, some of the other countries that are important to us are Vietnam, Bangladesh, Pakistan, and the Caribbean. We’ve got very good relationships there and have been able to, as well as anyone, I think, maintain our cost position. So I feel good about how we’ve handled that and how we’ve forward with that.

Carla Cassella - J.P. Morgan

And are you hedging any of your material or fuel costs?

Emanuel Chirico

No, we never have, historically. We always buy in dollars. We don’t -- absent the -- you know, the dollar is under a lot of pressure now so it’s not normal times. So we’ve been able to hold most of our vendors, particularly our Asian vendors, from a dollar point of view. We might see some more pressure on that in 2008 but overall, we don’t hedge.

Carla Cassella - J.P. Morgan

Okay, great and then my second question, you talked about the average unit retail in shirts being up. Is that price increases less promotion or mix shift?

Emanuel Chirico

When I talked about average unit retails in dress shirts being up, that has much more to do with less promotion and less clearance. We haven’t really changed our price ladders dramatically. It’s more about selling more at the first markdown and the second markdown and having less at clearance, and that’s been worth -- you know, somewhere in the neighborhood for dress shirts around $0.70 a unit. And when you think about the average dress shirt is somewhere in the mid 20s, that’s not insignificant. That’s 3% or 4%.

So it’s really been -- it’s really been disciplined inventory management control as opposed to trying to drive price and selling increases, selling price increases.

Carla Cassella - J.P. Morgan

Okay, great. That’s all I have. Thanks.

Operator

We’ll go next to Brad Stephens at Morgan Keegan.

Brad A. Stephens - Morgan Keegan

Good morning, everybody. First question on the CK royalty business, can you just give us some more color going forward and remind me just the moving parts -- the total is up 14 but royalties were up 8 and advertising up 31. Kind of the breakdown of how to think about that going forward.

Emanuel Chirico

It’s always hard on a quarterly basis to try and pinpoint anything. Last year was a 14-week quarter. This year was a 13-week quarter. We direct the advertising expenditures as we went forward and we tried to telegraph how we were going to handle that going forward. So I think it was all right when we saw it on plan for the quarter. And you just can never deal with the vagaries, you know, somebody shipped something in December versus going out in January, or something was just shipped in September rather than October. It’s just the vagaries of the business. There’s nothing to be gleaned from that at all.

Brad A. Stephens - Morgan Keegan

Okay. Second, could you break out the sales per square foot differences between your legacy outlet stores and your CK, as well as the operating margins between the two?

And then a question for Mike Shaffer -- could you just -- looking at the receivables, the trade and other, they are up pretty substantially. Is that a timing issue or what exactly are the differences there?

Emanuel Chirico

Mike is going to handle both questions.

Michael A. Shaffer

On the sales per square foot, the legacy businesses are about $250 a foot. The Calvin Klein outlets are about $500 a foot.

And on the receivables, a couple of things -- we’ve got the new businesses, which is a component of the increase, but in addition to that we did have some heavy up on our shipments in December and to some degree, January. So last year those goods had been shipped in November, we collected by the end of the year. This year, they went out a little bit later and in turn, we haven’t collected on the receivable yet. Our receivables are very clean, no change in terms of collections from last year. You know, we have a very small specialty store business so we ship into the big guys, not a bunch of little guys.

Brad A. Stephens - Morgan Keegan

But Mike, real quick back to the outlet -- can you give us an operating margin performance between the two?

Michael A. Shaffer

For ’07?

Brad A. Stephens - Morgan Keegan

Yeah.

Michael A. Shaffer

Between the two -- all-in, we run about 8% to 8.5% operating margins for the outlet business.

Brad A. Stephens - Morgan Keegan

And the CK business is probably mid-teens?

Michael A. Shaffer

That includes the CK, so if all-in we’re 8% and 250 on the legacy business, 500 on the Calvin, just in general it’s just a much more profitable business.

Brad A. Stephens - Morgan Keegan

All right, great, guys. Have a good year.

Operator

We’ll go next to Jeff Mintz with Wedbush Morgan.

Jeff Mintz - Wedbush Morgan Securities

Thanks. Manny, could you give us just a little more color on the IZOD versus Van Heusen and Arrow? It sounds like the IZOD is definitely outperforming, as has been the case. Just a little more color both on what happened in the fourth quarter and also how you are planning those businesses in ’08?

Emanuel Chirico

Sure, Jeff. I think it’s -- really the Van Heusen and the IZOD businesses have really performed well throughout this environment. I mean, we were -- both of those businesses we were on a growth trajectory and we just got caught up with what was going on at retail. Our open to buys have been adjusted for those businesses but not nearly a -- and for both of those businesses.

Our Arrow business at Kohl’s on the sportswear side has been adjusted more significantly. We really right-sized that business. We believed we were in some product categories that weren’t profitable for us or for them, so we took it and tightened it. We think we’re in a position now at sportswear to be much more profitable with them. And I think it’s really factored in all of that.

You know, Arrow also gets negatively impacted to a degree by what happens at Sears and Mervyns. Those businesses are just down. I think it has more to do with Sears and Mervyns performance than the brand’s performance. And that was -- that’s the brand that’s probably been most impacted by the $35 million, $40 million takedown in our legacy sportswear businesses.

Jeff Mintz - Wedbush Morgan Securities

Okay, great. And then Mike, probably just a couple of questions for you -- the $35 million to $40 million reduction in the legacy sportswear business, what’s the base off of which that decline is being taken?

Michael A. Shaffer

In terms of revenues?

Jeff Mintz - Wedbush Morgan Securities

Yes.

Michael A. Shaffer

We are looking at sportswear, all-in legacy businesses, of --

Emanuel Chirico

We break out -- we don’t break out each business but we do break out sportswear wholesale business, so that whole business is about $700 million.

Jeff Mintz - Wedbush Morgan Securities

Okay, and I guess the women’s is about 20 of that or so, so it’s really kind of being taken off at the 680 number. Is that about right?

Emanuel Chirico

And Calvin I said was a little -- was over 100, so you could do the math.

Jeff Mintz - Wedbush Morgan Securities

Okay, great. And then Mike, what was the revenue contribution from Superba in 2007?

Michael A. Shaffer

You know, about 150.

Jeff Mintz - Wedbush Morgan Securities

Great. Thanks very much.

Operator

We’ll go next to Susan Sansbury with Miller Tabak.

Susan R. Sansbury - Miller Tabak & Co.

Thanks very much. Keeping with Superba, if memory serves me correctly, the contributions from Superba in ’07 was what you had expected for ’08, so can you refresh my memory now about whether you expect the accretion from Superba to increase in ’08, given a less robust overall environment? Or is it going to be flat?

Michael A. Shaffer

The answer to that is you’re right. We did significantly better with Superba than we had originally planned. The accretion we had talked about was -- what we delivered this year was about $0.12 to $0.13 which compared to about $0.10 to $0.11 that we had talked about. We are advancing brands into Superba from other licensees faster than we had anticipated and for next year, we are looking at accretion to grow to about $0.14 to $0.15, and sales to grow about 5%.

Susan R. Sansbury - Miller Tabak & Co.

Okay, that’s perfect. Thanks ever so much. You’re doing a great job, by the way. I don’t think anybody has congratulated you, but I will. Thank you.

Operator

We’ll go next to Andrew [Byrd], Post Advisory Group.

Andrew Byrd - Post Advisory Group

Just a couple of quick housekeeping questions; Mike, can you tell me what the gross interest expense was for the year and also what the contingency payment to Calvin was?

Michael A. Shaffer

I heard the first part, I didn’t hear the second.

Andrew Byrd - Post Advisory Group

The contingency payment to Calvin for the quarter.

Michael A. Shaffer

Gross interest expense for the quarter was -- I’m sorry, for the year ’07 was about $34 million. And I believe the Calvin --

Emanuel Chirico

Thirty-five to 37 -- we’ll check that number, but we’ll get the exact number. Somebody’s just looking in one of the --

Andrew Byrd - Post Advisory Group

Okay, and while you are doing that, after the stock buy-back, any of the indentures limiting your ability to repurchase further stock or your restricted payments basket is still pretty wide open?

Emanuel Chirico

I’m going to make Pam answer the question.

Pamela N. Hootkin

We do have restricted payment covenants in our two senior note agreements. We still have availability in those covenants. They are not totally wide open for us to do, you know, millions and millions and millions of dollars but we have -- we probably have at least another [$20 million] in there for now.

Andrew Byrd - Post Advisory Group

Okay. Thank you.

Operator

Our next question comes from David Glick with Buckingham Research.

David J. Glick - Buckingham Research Group

Good morning and one more congratulations. I was trying to understand, Manny, just what your underlying organic growth sales assumptions are by major business, in terms of your outlook for 2008. It just sounds like over the last series of questions that dress shirts and neckwear, you’re looking at about a 5% or 6% increase for each of those businesses and not a lot of meaningful new brand additions, or a few in neckwear. But it sounds like mid singles is kind of your expectation.

On the sportswear side, what is the total versus organic growth when you factor in women’s IZOD and Timberland. I’m just trying to get a sense for what your assumptions are there.

Emanuel Chirico

Okay. Bear with me -- I guess we are planning our sportswear business to overall to grow in the 5% to 7% range. That’s our -- with our legacy businesses, overall including Calvin, including some of the new businesses. Our legacy businesses are planned to contract this year as we right-size the business and depending on the brand, I think it could be down anywhere from 3% to 5%.

David J. Glick - Buckingham Research Group

And you see Timberland and women’s IZOD adding about --

Emanuel Chirico

Next year I think -- I think Mike quoted about the IZOD women’s business would be $60 million plus and the Timberland business, half the year, I figure 25.

David J. Glick - Buckingham Research Group

And then just to complete the circle here, in outlets you gave us the comps. What do new stores add in terms of the overall percent increase?

Emanuel Chirico

That’s a -- we’ve gotten -- between TYOs, last years open -- this year’s openings and last year’s openings, it’s about 30 stores -- bear with me one second here. It’s worth about 4% to 5%.

David J. Glick - Buckingham Research Group

Okay, great. And then last question -- any color you can give us now that Easter is behind us? I know there’s some weather disruptions out there so it may be tough to interpret the results, but can you give us any color on what’s happening at retail in your own stores and your big customers in terms of how the sort of early Easter impacted business?

Emanuel Chirico

I’ll tell you, yesterday was a great day. That’s how closely we’re watching it. It’s very hard because -- especially in the outlet store business. It’s as important as school breaks and spring breaks and when the kids are off and when they are going on vacation, as it is the falling of Easter. And they are not necessarily aligned geographically around the country. So it’s very difficult to get a handle on.

We were pleased with the business last week, the week before Easter, even though it was for pre-Easter, it was unusually cold. I don’t know if it was unusually cold for March 15th, but it was unusually cold to be the week before Easter. So clearly the early Easter has not been a benefit for us, given the weather trends that just haven’t cooperated with the business.

So we’re really not -- I don’t want to give you half an answer, David. We won’t really have a good handle until I get to the second week of April and by then I’ll be able to give more color and talk about it. So we are being cautious as we are projecting it. We are trying to understand it. It’s hard to determine how much growth to plan in April given the Easter shift, and offsetting that is obviously the warmer weather and how it gets interpreted.

So I guess I’d just as soon wait to let you know. We are cautious about it by now.

David J. Glick - Buckingham Research Group

And a similar answer for your big customers?

Emanuel Chirico

Yeah, I guess. You know, I think there was a general sense that they were happy with business last week and I think it will be important to see how this week goes.

David J. Glick - Buckingham Research Group

Okay, great. Thanks and congratulations and good luck.

Operator

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

Clark Orski - KTP Investment Advisors

I just had a question on the balance sheet. I mean, you’ve still got a lot of cash. Are you thinking about buying back more shares or cash for acquisitions? What are your thoughts there?

Emanuel Chirico

I think consistent to what we’ve been saying for the last three years is our first priority would be to continue to look for acquisitions. And we believe that the market that we are in today, for a strong strategic buyer with a strong balance sheet that has cash and can borrow, this is the time to make acquisitions that in the future pay significant dividends, because you can buy them right and you can do a transaction that makes a lot of sense.

Just to remind everyone, we did the Calvin Klein transaction. We announced it in November of 2002. At that point in time, the bond market we were told was closed. There was no financing from businesses. We were able to put a deal together at that time that is clearly paying dividends.

So I think chaotic times are times when good companies do acquisitions that really can fuel growth going forward. So we’d like to be aggressive in that area. We’d like to continue to look but to be consistent with what I’ve said overall, we would continue to look for -- if we can’t find the opportunities and if we are talking about generating $80 million or $90 million of free cash flow this year, if we are sitting on $350 million to $400 million in cash next year, we will look -- we will not be a bank and just sit there with cash. We will do what’s appropriate for the shareholders and return the money. But I think we’ve demonstrated ability to do acquisitions, to do them accretively, to get them in and integrated appropriately, and that’s the best way we believe we can deliver value to our shareholders.

Clark Orski - KTP Investment Advisors

Are you seeing more opportunities now, given that the environment has kind of fallen apart?

Emanuel Chirico

You know, as things have opened up, valuations have gotten more realistic but still haven’t gotten where they need to and I think it will start to flesh out over the next three to six months, is my belief.

Clark Orski - KTP Investment Advisors

Okay, thanks and just one question -- can you tell me what the D&A was for the year?

Emanuel Chirico

Yes, for ’07 D&A was about $47 million.

Clark Orski - KTP Investment Advisors

Thank you very much.

Emanuel Chirico

Okay. All right, I guess I’d like to thank everyone for joining us. I look forward to speaking to you on our first quarter conference call in May and have a good day. Take care.

Operator

Again, that does conclude today’s conference call. Thank you for your participation. You may disconnect at this time.

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Source: Phillips-Van Heusen F4Q07 (Qtr End 2/3/08) Earnings Call Transcript
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