Good day everyone and welcome to today’s Phillips-Van Heusen Corporation’s second quarter 2008 earnings release conference call. This webcast and conference call is being recorded on behalf of PVH and consists of copyright material. It may not be recorded, reproduced, retransmitted, rebroadcast, downloaded or otherwise used without PVH’s express written permission.
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At this time I would like to turn the call over to Emanuel Chirico.
Good morning everyone and thanks for joining us on the call. On the call with me this morning is 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 were quite pleased with our second quarter earnings release and results particularly in light of the difficult retail environment that we’re dealing with. Let me start with Calvin Klein licensing business, our Calvin Klein licensing business had an extraordinarily strong second quarter. Royalty revenues increased 28% in the second quarter and operating earnings grew over 47%.
Results were very strong across all geographic regions and virtually all product categories. Royalty revenues grew internationally about 35% while domestic business was up about 15%. Michael Shaffer our CFO is going to quantify the details of the quarter, what I’d like to do for the licensing segment of Calvin Klein is focus on the first half results to give you a perspective of the business.
When you look at the first half overall royalty revenues grew about 23% and our operating earnings for the first half were up about 32%. Overall our operating margins for the first half of the year increased by about 300 basis points to over 53%.
Looking at our large businesses, I’m going to start with the Warnaco businesses, our jeans royalties for the first half were ahead a little bit more than 25%. Our international jeans business was up 40% while the US business was ahead slightly more than 10% for the first half of the year.
The US growth was driven by the women’s jeans business as well as the newly launched plus size department store business. Our international business was driven by strong performance throughout Europe, Asia and throughout the Americas. Strong retail performance was fueled by comp store growth of over 20% as well as continued expansion of retail stores particularly throughout Asia.
Moving to the underwear side of the business royalty revenues were the first half were ahead over 20%. The business grew in the US about 10% while international growth was an impressive 35%. The international growth was driven by the direct to consumer portion of the business; this growth came from comp store growth of about 20% and the continued opening of new retail stores.
We saw continued strength on the men’s side of the business from the success of our Steel launch which has continued to benefit from an extremely strong product offering and amazing marketing campaign that features Djimon Hounsou throughout the first half of the year.
Just to remind everyone, Steel launched at the second half of last year. It was a tremendously successful launch for us and that momentum has just continued into the first half of this year.
The major news for fall is the launch of Seductive Comfort which we believe will bring as much excitement to the women’s business as Steel has done for the men’s business. The launch will be supported by a major marketing campaign featuring Eva Mendez. The product offering and the marketing campaign has been received very strongly by our retail partners. There’s been great marketing and PR buzz surrounding the campaign and we think the marketing machine is working very well for us with this launch and we’re very excited as we head into the third quarter, particularly around underwear.
The strength of Steel coupled with the new launch we think will continue to fuel the growth in the Calvin Klein underwear business.
Moving to Coty our fragrance business, Coty for the year is ahead of plan and is up for the first six months of the year about 3%. That’s very important when you consider we were planning this business down in the first half of the year because we were up against some major product launches in particular the CK IN2U launch was in the spring of 2007; that was a tremendously successful launch for us.
That franchise is over $100 million wholesale shipment business for us today, so we were up against that launch. That launch continues to be very strong and even being up against that launch, our business was ahead for the year about 3%.
Just to remind everyone, we are coming off of three years of 20% plus growth in our fragrance business driven by new launches which started with the Euphoria, continued with CK IN2U last year and for the second half of last year Calvin Klein Man launched.
For the fall we have a major fragrance launch planned; it’s Secret Obsession. The campaign also features Eva Mendez and the advanced PR and media buzz surrounding the campaign has been outstanding. It’s been talked about throughout on the internet, there’s been numerous articles written about our campaign. It’s a very risqué campaign and given that the excitement that’s being built around this launch, we believe Secret Obsession will be a major launch for us for fall. So we have high hopes for our fragrance business as we turn to the second half of the year as well.
Moving to our other licensees, another one of our major licensees is G3. We just recently announced the signing of a new license agreement with G3. We’ve entered into the women’s Better sportswear license for the Americas. They are taking over the [Kellwood] position on that business. We believe that this is a major untapped opportunity for the brand. G3 is a terrific partner. They have a proven track record with the Calvin Klein brand.
To remind everyone they are our licensee for women’s dresses; the women’s dress business which launched last year is well ahead of all of our plans. It’s up against budget about 30% where we planned it and it’s up against the prior year which was a partial year; it’s up over 75%. They are also our women’s suit licensee and that business is up 15% through the first half of the year. They’ve done extraordinarily well positioning that product.
The product offering is terrific. They are our coat licensee for men and for women’s and we have one of the largest coat positions in department stores with Calvin Klein brand that they helped to build. And this year they’re also launching performance active sportswear on the women’s side of the business. So G3 has been a key strategic partner for us. The agreement that we signed with them has provided them with new minimum royalties that they believe they can exceed but we are financially protected on that transaction as Kellwood continues to be our financial backstop against the minimum royalties that they originally signed in their license agreement.
So from a financial point of view we are in as good or better position then we were before the signing of this new license and we have the opportunity with a very experienced Calvin Klein licensee who we have a great deal of confidence in to really build this business over the next five years to a business that we think can approach $200 million at wholesale. So again very happy about that business. G3 has done an excellent job for us.
Another licensee has performed extraordinarily well for us is Peerless. They are our men’s tailored clothing provider. Their business through the first half of the year is up over 35%. The tailored clothing business for us is very strong with Macy’s. We have a major position there and we have new product offerings, a range of product at Dillard’s that has also been extremely strong for us. So the business there continues to be very strong.
Continuing with Calvin Klein, on the businesses that we operate, our men’s Better sportswear business continues to perform exceedingly well. Shipments and profits are ahead of plan and the prior year. At department store Calvin Klein continues to be one of the best performing men’s collection sports businesses on the floor and that’s measured on a sales per square foot basis and a maintained gross margin basis. So that business continues to have momentum, continues to grow and we feel very good about it.
Moving to our Calvin Klein outlet retail business, again we had a very strong quarter with that business. We continue to have great momentum there. Our comps for the second quarter were up 9%. Our comps in the first quarter were up about 10%. Margins are well ahead of last year. This business is one of our most profitable retail formats and is on the way to becoming our most profitable operating division. These stores average sales per square foot of about $550 and in-store four wall profitability of well in excess of 30%.
We currently operate a little bit more than 85 of the Calvin Klein outlet stores and we believe the opportunity throughout the United States is close to 135 to 140. We announced in our first quarter that we would be closing our Geoffrey Beene retail division of approximately 100 stores. Of those 100 stores 25 of those stores will be converted to the Calvin Klein format by year end.
The vast majority of those conversions will take place during the month of January. The Geoffrey Beene liquidation and close down is moving well ahead of plan. It’s going exceedingly well. We’re on target to open the Calvin Klein stores. We believe by taking these 25 Geoffrey Beene stores and converting them to the Calvin Klein platform will accelerate the Calvin Klein growth and add to the profitability of what is our most profitable retail division.
Moving now to our heritage businesses, our heritage businesses in the United States continue to be impacted by the difficult environment. Overall our combined wholesale and retail business posted 2% sales decline and a 270 basis point decline in operating margins. The operating margin contraction was due to slightly lower gross margin and a de-leveraging of the operating expenses.
Speaking to the components of the legacy businesses, on the dress furnishing side of the business we continue to perform very well at retail. Our dress shirt and neckwear businesses at retail are running ahead on a comp store basis at all of our retail accounts. The dress shirt component of our retail partners’ businesses, our major retailers, and dress furnishings continues to be one of the best performing departments on the floor.
They are for the most part just about all of our retailer accounts for the department are running positive comp store trends and our business throughout our major customers are running 200 to 300 basis points higher comp store trend in the dress shirt department. So we are clearly driving the performance of dress shirts and neckwear throughout America. Very strong performance at retail both from a sales performance and a margin point of view.
During the second quarter we did see some inventory management going on, on the part of our retail partners. We did see retailers tightly managing the inventory intake and attempting to balance their overall inventory position. We saw about $8 million in sales that were planned to be shipped in the last 10 days of July that were actually shipped in the first five days of August. So there was some roll over of goods; about $8 million. We are monitoring this situation very closely and believe that this push out is a one-time event.
Its not a push out that will continue for the balance of the year. We believe as we move into the second half, particularly with the back to school selling season and with the holiday selling season, that our performance is so strong that we really believe the retailers will be pulling the goods out at the beginning of the shipping windows as opposed to the end of the shipping windows. We believe it’s such a strong selling season particularly for dress shirts that we don’t believe that we’ll see this push out continue into the third quarter or fourth quarter.
The impact was about $8 million and it would be about $8 million for the year but at this point in time we don’t see as slowdown going forward on that. It was something that we dealt with, we absorbed in the quarter and we’re able to still deliver our earnings results.
On the wholesale sportswear side of the business our sales plans are in line with our customers’ reduced sales expectations and their reduced overall open to buy position. With the exception of the Mervyn’s and Boscov’s Chapter 11 disruption, our wholesale sportswear business met their second quarter sales plans and profit expectations. So we are right on plan with where we felt we would be in our sportswear business. We took those open to buy positions down in our sales expectations down with it and we are right on target to deliver our business as we go forward into the second half.
Our heritage brand in outlet business continued to be a challenge for us in the second quarter. We had planned our comp stores at about negative 2%. Our actual comp store sales declined about 5% in the quarter. That put pressure on our retail gross margins and it also put significant pressure on our operating expenses as there was a de-levering of expense. So when we look at our wholesale businesses we came in slightly worse then we thought we would but Calvin Klein more than made up for that shortfall in delivering our results.
I’d like to take a minute and talk about our marketing for our brands; we continue to invest in our brands. I think you see the Calvin Klein advertising everywhere and I think you’ve also seen our heritage business continue to make the investment in our IZOD venues and in Arrow brands to continue to invest in those brands.
As we move into the second half of the year, our total second half of the year marketing spend is being planned flat 2007 versus 2008. However, we are shifting $10 million or $0.12 of our marketing spend into the third quarter. There’s a couple of major events that are going on that we needed to take advantage from a marketing point of view and we made a decision on the last 60 days, particularly on our heritage brands to invest in those venues to really support our brand development.
Some of the events were the Olympics. Our heritage brands has a tremendous opportunity to make a very opportunistic media buy basically on television, some supporting print campaign with it, but basically on television with Arrow, IZOD and Van Heusen to really take advantage of this once in every four year event for the summer Olympics. We think we’ve gotten great marketing buzz but also great PR buzz associated with the advertising.
We know it was the right decision for our brands and to accelerate that expenditure into the third quarter and we’ll be reducing our fourth quarter expenditures at a similar amount. In addition this year we’re celebrating the Calvin Klein 40th Anniversary Celebration. That’s a major event for us. It will take place during the month of September. We have a number of events going on and it’s targeted in association with Fashion Week that’ll take place in September.
We also have a number of major product launches that I touched on for Calvin Klein; fragrance, the Secret Obsession launch will be a major marketing campaign, Seductive Comfort, our underwear campaign, both with Eva Mendez. Those two launches will take place in the third quarter as well. We are putting our marketing dollars behind that and we’re expanding our world of Calvin Klein event with Macy’s. That event will take place in the latter part of September.
It’s being expanded to all Macy’s doors from 300 doors last year. So just in summary, our marketing spend for the year and for the second half is being planned flat but we are having shifting marketing dollars out of the fourth quarter and into the third quarter to the tune of about $10 million. It impacts us about $0.12 per share in the third quarter and it is the sole reason why our growth in the third quarter is not as advanced as we would have normally projected it to be and why our advance in earnings per share for the fourth quarter is so advanced with a $0.12 benefit that we’ll have there for reduced marketing spend.
And with that I’m going to turn it over to Michael Shaffer, and I’ll come back with some closing comments on the opportunities and risks we see in the second half of the year.
Thanks Emanuel, the comments I’m about to make include non-GAAP comparisons related to the Geoffrey Beene outlet store shutdown and are reconciled in our press release.
Let me begin by reviewing our results for the second quarter, our revenues for the quarter were up 2% to approximately $561 million. Strong performance in our Calvin Klein licensing business which was 30% ahead of last year more then offset shortfalls in our combined wholesale and retail businesses.
Our combined wholesale and retail business revenues were down $11 million or 2% for the prior year as a result of the difficult economic climate, bankruptcies, and negative heritage outlet comp store sales. Our gross margin on sales for the combined wholesale and retail businesses was approximately flat to the prior year as a result of our tight inventory controls. On a total company basis gross margin was up 190 basis points to the prior year reflecting the benefit of the strong Calvin Klein licensing performance.
Operating expenses for the second quarter for the combined wholesale and retail businesses increased 250 basis points from the prior year and include start-up costs of $5 million as well as the de-leveraging of expenses as a result of sales declines.
Operating expenses for the total company increased 240 basis points from the prior year as a decrease in the Calvin Klein operating expenses margins in the quarter helped offset a portion of the increase in the wholesale and retail businesses.
Earnings for the quarter were $0.66 at the top end of our guidance. From a segment point of view, the Calvin Klein licensing business delivered very strong operating income growth of 47% while our combined wholesale and retail businesses posted operating profit declines to the prior year of 30%; the net affect of this being a decline in total operating income margins of 50 basis points versus the prior year.
As we look forward we are maintaining our guidance for the year at $3.32 to $3.41. Our revenues for the year are projected to be $2.56 billion to $2.58 billion, approximately 6% greater then the prior year. The revenue increase is being driven by the Calvin Klein licensing businesses, which is planned to increase 15% for the year.
Our combined wholesale and retail businesses are planned to increase 3% to 5% for the full year. This increase reflects the additional revenue from the Timberland men’s Better sportswear business which was launched mid-year 2008, a full year of IZOD women’s wholesale sportswear sales, along with the sales benefit from the annualization of the Calvin Klein specialty stores opened last year plus the specialty stores opened this year.
On the retail revenue projections are based on legacy comp store sales projected at negative 3% to negative 4% for the year, and our Calvin Klein comp stores planned at plus 8% for the year.
Operating margins for the year for the total company are planned to decrease 60 to 80 basis points with Calvin Klein operating margins increasing 260 to 280 basis points and our combined wholesale and retail businesses declining 100 to 130 basis points driven by sales declines and the de-leveraging of expenses.
As we look to the third quarter, earnings per share is projected at $1.07 to $1.13, an increase of 2% to 8% versus the prior year. Third quarter revenues are projected at $730 million to $740 million or 5% to 6% greater then the prior year. For the third quarter we’re projecting our Calvin Klein licensing business to have revenue growth of 9% to 11% and our combined wholesale and retail businesses to grow between 2% and 4%.
Comp store sales for the third quarter are projected at negative 2% to negative 3% for our legacy outlets and plus 7% for Calvin Klein outlets. Third quarter gross margin for the company is expected to increase 70 to 90 basis points driven by Calvin Klein licensing growth which carries a 100% gross margin coupled with an increase in the combined wholesale and retail business gross margin of 60 to 80 basis points as sell-throughs for our products remain above our plan.
A significant impact to the third quarter results is a shift of $10 million or approximately $0.12 of advertising spending from the fourth quarter into the third quarter versus last year. This third quarter increase is supporting planned activities surrounding the celebration of Calvin Klein’s 40th Anniversary in September as well as having made opportunistic media purchases for our legacy brands during the Olympics.
As a result, income margins for the third quarter for the total company will decrease 180 to 200 basis points driven by similar declines in the operating margins in both the combined wholesale and retail business as well as declines in the Calvin Klein licensing business.
Overall our marketing spend for the second half of 2008 will remain relatively flat. I would like to point out that we continue to plan our tax rate for the year at 36.5% to 37%. In the third quarter we expect our tax rate to decline to 32.5% to 33% as a result of certain discreet tax items that we recognized in the quarter.
Lastly we continue even in this difficult environment to maintain our cash flow projections at $80 million to $90 million for the year and project to end 2008 with approximately $350 million in cash.
And with that, I’ll turn the call back over to Emanuel.
Thanks Michael, what I’d like to do is just put the business and the guidance into some type of perspective to really just talk about the risks and opportunity associated with the guidance.
When we look at the Calvin Klein licensing business revenues for the first half of the year, royalty revenues were up about 23%. We’re planning the second half at a rate of 10% growth overall. Given the trend of the business, there’s clearly opportunity to do better then our current estimate that’s out there. We believe it’s a conservative estimate. We believe in the first half there are a number of things that won’t anniversary and that we are up with some of our licensing partners against much stronger business and some product launches last year.
But on balance, there’s clearly upside against the royalty revenues. Somewhere I think, rather then 10% we could be closer to 15% when you take it all in and I think that clearly gives us upside against any risk that we might have in our heritage businesses.
And to talk about that, let me just speak about our dress furnishing business, I mentioned how strong the business is at retail. We continue to feel good about how that business is performing. Our platform and our operating platform there works very well. Our sales projections in the second half is the wholesale shipments will grow 25 to 4%; that’s totally inline with our retail partners’ projections of what they see for sales for back to school and the holiday selling season.
So we really see minimal risk when we look at the dress furnishing business. On the wholesale sportswear side of the business our new launches, both Timberland and IZOD women’s are having strong reception at retail. The IZOD women’s business is now, has a full 12 months’ worth of results and the performance has been very strong at retail. Continue to get good results there and our Timberland business which just launched, the reaction to the product has been positive. The initial selling, we had a small launch with the product associated with Father’s Day, was very, very positive.
But again, we’re just beginning to ship those goods, but that business seems to be off to a good start in a tough environment. Our heritage sportswear businesses are being planned down for the second half about 3% to 4%. That’s inline with our retailers’ planned orders, with their planned bookings and we’ve been on plan with these businesses throughout the year.
We are looking for some improvement in the fourth quarter. It think that’s being driven by a couple of things, particularly that we are anniversarying much tougher business, last year’s fourth quarter with our sportswear business. We began to feel the pain of last year’s results in the fourth quarter with orders being reduced so we think we really have a much easier comparison there.
But even overall looking at the second half are being planned down 3% to 4% and we think there’s minimal risk against our wholesale sportswear business. On our heritage outlet business, year to date comps are negative 5%. They’ve been pretty consistent give or take 50 basis points from the first quarter to the second quarter. We are planning that business at about negative 2% to negative 3% for the balance of the year.
The improvement is being driven of our belief that we will do better in the second half because our comparisons are much easier in the second half of the year particularly beginning at the last week of August. Just to put it into perspective, our prior year first half comps overall for our heritage businesses were up about 2.5% and our prior year second half comps were down about 2.5%.
That 500 basis point swing in business we believe should give us some improvement in the trend of comps. We’re not looking to get it all; we’re looking to get about half of it. So we’re taking our trend from negative 5% to about negative 2.5%.
With initial selling in August has improved somewhat over second quarter results on trend is about negative 3% right now and we really have not anniversaried the easier comparisons. That will begin starting next week so more to follow there.
When we look at our heritage businesses, whatever risk that we might see there we see the Calvin Klein business having the opportunity to offset most of that and if not all of that. So we feel very good how we have the business planned for the second half of the year. We believe our numbers are very achievable. We do recognize when you look at the bottom line earnings per share we are looking for substantial growth in the fourth quarter and not as much growth in the third quarter but the entirety of that differential is the $0.12 or $10 million marketing spend that we’re accelerating into the third quarter.
If marketing spend was at the same levels in this yea’s third quarter as last year’s third quarter, we’d be looking for 15% to 20% earnings growth in the third quarter and a similar amount in the fourth quarter and the only real variance that you’re seeing such improvement in the fourth quarter is driven by that $0.12 a share shift in marketing associated with our brands.
And with that, we’re ready to take your questions.
(Operator Instructions) Your first question comes from the line of Jennifer Black - Jennifer Black & Associates
Jennifer Black - Jennifer Black & Associates
Can you talk about White Label; you have not spoken about the White Label stores?
We have 10 stores open as of today that was our plan to open 10 Calvin Klein specialty stores. This year the openings this year have outperformed our prior year openings. The five stores we opened this year, three of those stores on the West Coast, one store is in Miami, and one store is in Las Vegas. We believe the quality of the real estate on the second tier of stores is better, positioning in the mall is better. This year’s stores are slightly smaller. They average close to 8,500 square feet which we believe is more or less the right size for the stores. We’ve seen some improvement in the stores particularly in the second quarter of this year. They are averaging close to all in the 10 stores about $400; they’re trending towards $400 in sales per square foot.
We’re still underperforming our original pro forma but we’re learning a lot. We think the stores are really presenting the White Label merchandise and really providing us with a showcase for the brand and we believe as we go forward that we’ll see continued comp store ramp up. So at this point we’re feeling good about those stores. Our plan calls for us to potentially open five stores next year. We’re being very cautious about that in this environment.
And we will look only at some of the best real estate in America before we do that. I would think that we’re probably more inline that we will open one to three stores next year and continue experimenting and understanding that format. We think it’s a format that long-term will work for us and we think it’s terrific for the brand to have that presence at regular retail.
Jennifer Black - Jennifer Black & Associates
How long will it take for you to do the conversion of the Geoffrey Beene stores to Calvin Klein, what’s realistic and are there other stores in the heritage businesses that you could do the same thing with?
We will be converting the 25 stores all in the fourth quarter, about four of those stores will convert early fourth quarter, balance will convert in the end of January in order to efficiently move through Geoffrey Beene inventory and get the most value for the liquidation. It’s best to be in a position with the stores through the Christmas holiday selling season. So we’re right on target, right on plan but from a profit opportunity you really have to look at those stores as a 2009 event as we go forward.
When you look at our other three legacy businesses, Bass, Van Heusen and IZOD, those are proven retail strategies for us. We don’t believe we see any opportunity to convert or downsize those stores to create opportunity for Calvin Klein. By the end of this year we’ll be operating about 110 Calvin Klein outlet stores. We believe there’s an opportunity to get close to 140 and I think we’ll get there over the next three years. I believe that will be by expanding real estate as opposed to converting our existing store base.
Your next question comes from the line of Robert Ohmes – Merrill Lynch
Robert Ohmes – Merrill Lynch
Can you tell us how big the Timberland men’s launch was or is expected to be for this year and also can you update us on the women’s launch, is it still on track for spring 2009 and then if you could remind us on share repurchase versus acquisitions, where the priorities look right now for you?
The Timberland launch this year, we originally talked about $30 million to $35 million, it will be closer to $40 million this year on launch. We are able to recoup some additional doors with Macy’s and some of our other retail partners. So we’re really happy about how that’s proceeding. The Timberland women’s business continues to be a concept for us and continues to be a focus for spring 2010. It’s always been 2010 and that’s our goal right now is to launch 2010.
The share repurchase, we’re going to generate somewhere around $80 million to $90 million in cash this year and that’s after making some significant investments in our infrastructure and doing a small acquisition in the neckwear area. I believe what we would like to do with our cash is to really focus on strategic acquisitions that will continue to be our first priority but I’ve been pretty consistent in saying we’re not going to be a bank and just hold cash as a stockpile. So we will look at our capital structure as the year progresses particularly into the second half, first half of next year, we’ll look at what the M&A pipeline looks like at that time and if we see opportunities and then along with our Board, we’ll make a decision about a share repurchase plan.
We completed a $200 million share repurchase plan in the first quarter of last year and we would look at that same opportunity given the timeframe this year to see what would be appropriate given the environment.
Your next question comes from the line of Emily Shanks - Lehman Brothers
Emily Shanks - Lehman Brothers
Can you tell us what G&A was for the quarter?
For the second quarter G&A was approximately $14 million.
Emily Shanks - Lehman Brothers
In terms of the EBIT hit from exiting Geoffrey Beene, the $8.687 million, can you give us a sense of what portion was cash versus non-cash?
For this quarter we took a significant charge on the write-off of the assets so for this quarter so I would say approximately $2 million to $3 million was cash for the quarter.
Emily Shanks - Lehman Brothers
Can you comment around what your sense is of international tourism, and potentially influencing either the CK outlet as well as the retail stores?
In certain parts of the country, New York, Florida, and Las Vegas to a degree, tourism seems to be strong and from an international point of view, and more importantly with the dollar, Euro and some of the other currencies differential, you can clearly see that international tourists are shopping and their shopping with their bags open and their wallets open. In certain markets it’s significant, less so for our specialty stores, more so for our outlet stores which tend to be located in tourist destinations areas like Orlando and Vegas, so I would say we see it there and we also see it in our collection business in New York on Madison Avenue. That business continues to be very strong for us in our Madison Avenue store and tourists come in and we think a substantial portion of that business is driving our sales as well.
Emily Shanks - Lehman Brothers
Would you say though that there’s still an underlying demand away from international tourism?
I’m just not close; I don’t want to sound like an expert when it comes to that. I can only talk about how it’s impacting our business. I really can’t speak to tourism statistics in general. I can tell you that traffic is down in the outlet centers and it’s down most specialty retailers. I believe that’s probably driven, the vast, vast majority of that is being driven by US tourism being down, people not getting in their cars and travelling as frequently and just the demands that people have on them with the price of gas or whatever.
So I think we’re clearly seeing in our outlet stores in our legacy business our comp store trend at negative 5%, our traffic is about the same level, at about negative 5%. We have counters in a fair number of our stores and based on that I just say footsteps coming into the stores are less.
Your next question comes from the line of Kate McShane – Citigroup
Kate McShane – Citigroup
Could you give us more detail behind the monthly comps for Calvin Klein because I think you stated last conference call that the Calvin Klein retail comps started the quarter up 11% but they ended up around 9%? On the balance sheet receivables were up around 14% during the quarter and I think we’ve seen receivables picking up now for the last several quarter, can you give some detail behind that as well?
Getting pretty granular on Calvin Klein, the trend I guess through the first three weeks of May was plus 11% and we did some see some softness in July overall, when I say softness in all of our retail businesses, it continued to be positive, I think Calvin Klein was probably about plus 8%, but then for the first three weeks of August its been closer to plus 12%. So you have to be careful about school return dates and that impacts, and vacation scheduling so there’s a number of issues, but on balance, the trend in Calvin Klein has been between 8% and 12%, pretty consistently month to month for the first half of the year.
On the receivables, we do see an increase in receivables, about 14%. I can tell you we took a charge in the quarter for two customers who declared bankruptcy, Chapter 11. Our receivables are very clean. We don’t see a delay in payments. The balance increase is primarily driven by the timing of shipments.
Your next question comes from the line of Ben Rowbotham – Goldman Sachs
Ben Rowbotham – Goldman Sachs
Can you talk a little about traffic, I know you noted that your stores do have counters in them and that you were saying it was slightly down in the last quarter, when you look at the ease in comparisons coming up do you expect those to pick up more from traffic or more on the ticket side?
I think our traffic in our stores is down about negative 4% overall our comps are down about negative 5% so and again we don’t have counters in every store so I think the conclusions we’ve been drawing pretty consistently is comp store declines are being driven predominantly by lack of traffic in the outlet centers. I think that’s been pretty consistently stated by most other retailers in that channel. As we go forward it’s clear that when you look at last year’s comp store performance it was also driven by traffic. The plus 2.5% comp store trend that we saw in the first half of the year was driven by better traffic in the centers and the negative 2.5% that we saw last year was driven by less traffic in the centers so we are expecting the softness at retail that we experienced last year’s second half that was basically traffic driven to just be an easier comparison to where we were.
So we think its very much inline, traffic is what’s driving the comp store performance.
Ben Rowbotham – Goldman Sachs
Can we get some color on where the inventories are at within that channel, given that gross margins are expected to pick up and your certainty around that number, I think it was cited at 60 to 80 basis points?
Our inventories when you take out the new businesses overall, are down about 5% and our retail inventories relating to the outlet business are down closer to 8%. So we are much cleaner, we are really managing the gross margin dollars and not only are we cleaner on dollars and units, we’re cleaner from the seasonality point of view, less of percentage goods carrying over by beginning of month September our spring inventories will be significantly below where they were at that time last year. So from the quality, quantity of inventory in the outlet channel is much better and that gives us a confidence that there’s an opportunity on the gross margin line to even do better in that channel of distribution as we go forward particularly if we hit our sales plan, that there’s opportunity on the gross margin line.
Ben Rowbotham – Goldman Sachs
With regard to Mervyn’s and Boscov’s, there are no other charges left to be had there in terms of reserving for anything on a go forward basis, correct?
No, we took our best estimate of what we thought the collection on against those receivables would be and we’re in good position there.
Your next question comes from the line of Robert Drbul - Lehman Brothers
Robert Drbul - Lehman Brothers
On the IZOD business with America Living and JCPenney, have you seen any major impact on that business within that particular store?
When we planned the business with Penney’s, Penney’s was very strategic with us to make sure we didn’t lose open to buy position or position on the floor. The IZOD brand was one brand that was clearly focused on to continue. I would say the JCPenney’s business has been tough in general and the American Living business, I don’t like to talk about my competition, but that business has been tough and its manifested itself from a competitive point of view of that there’s a significant liquidation throughout the second quarter of inventory going on at JCPenney at significantly reduced price points.
So the American Living goods are going out the door at a lower retail then was being planned and I think that’s putting pressure on the competitive set but the IZOD AURs continue to be above last year’s. Our performance at Penney’s continues to be very strong in all categories; women’s and on our men’s sportswear side of the business and in the licensing products including kid’s. And we compete with American Living on every side.
So I don’t want to say we haven’t felt anything, we’re clearly dealing with it and it has been disruptive from a promotional cadence point of view but our AURs are up, and we’re right on plan with Penney’s from a maintain margin and a sales plan. It’s a competitor that we clearly watch and monitor.
Robert Drbul - Lehman Brothers
On markdown support, when you look at the first half of this year versus the first half of last year and your assumptions for the second half of this year versus the second half of last year, has it changed dramatically in terms of what you expected the markdown support to need to be and when you think about it in the back half of the year, do you think that you’ve allocated enough dollars from that perspective or is there risk or you’ve been very conservative with that as well?
I think we reacted pretty quickly to the sales trends that we saw in the second half of last year and beginning in the third quarter of last year. So I think where we took it on the chin to put it bluntly, was on the sales line. I think we looked at plans, we worked with our retail partners and we made sure we got the inventories in line with the sales expectation and if we had any pain associated with that it was in the wholesale shipments and its been reflected, it reflected itself on the sales line as we go forward.
Our gross margin and our allowance performance and maintain margins at retail have been very good because we’ve kept our inventories clean and haven’t been put into that situation. I would say to you as we got our inventories in line the support was heavier in the first quarter then in the second quarter because the inventories came in line as we came out of the holiday season and with inventories being significantly in better position that retail, our inventories in department stores are down somewhere between depending on the brand, 5% to 12%.
Inventory levels are significantly cleaner then last year so we are rightfully planning for some improvement in the margin support from last year because we had a much higher sales plan last year at retail that just didn’t materialize for anyone and we’re expecting higher AURs and somewhat less promotional selling going on the second half of the year and I think we’ve been seeing that for now the last four months at department stores.
Robert Drbul - Lehman Brothers
On the marketing spend, as you go into the fourth quarter how much discretion are you wiling to use in terms of the marketing dollar investments that you make if the environment remains this difficult as it is today?
If you’re asking me do we have levers, you always have levers on managing expenses. If things were to get tougher then you anticipated to potentially play if business goes forward. I think that there’s $2 million to $3 million just in the fourth quarter alone just with our heritage brand that if we chose, if things got very tough we could chose not to spend. But at this point in time we’re committed to spend those dollars and we’ll continue to support the brand.
Your next question comes from the line of Omar Saad – Credit Suisse
Omar Saad – Credit Suisse
On the US dollar, it looks like its starting to stabilize and strengthen here, and something probably we’ve haven’t done as good a job of in the past understanding the foreign currency impact on your business, I know from the Calvin Klein piece a big chunk of the royalty revenues are coming from overseas. Could you help us understand what that impact has been over the last year or two and how it could look going forward if the dollar strengthens further?
The net impact to us because we have licensing income and we also international expenses, for the first half of the year there was a $3 million to $4 million and in the second half we’re projecting $2 million to $3 million of benefit that we received this year going forward. The focus on currencies tends to be the Euro and I think when the Euro is going up, it was to some degree it was definitely impacting our business, I’m not saying that, but there was an over emphasis on it because we do have a number of currencies we’re dealing with and some of those currencies all moved and were appreciated but not to the level of the Euro.
That’s the impact of it. I think on balance we’d like to see the dollar stabilize and appreciate further because I think it was benefit us from a [softening] point of view because I think the flip side which is very hard to quantify is that obviously the weakness of the dollar has had impacts throughout the supply chain and we will really start to see that with product costs beginning in the fourth quarter but more dramatically spring 2009.
So as the dollar strengthens I think its softening some of that but clearly that’s an area where we’re starting to look at.
Omar Saad – Credit Suisse
On inflation on input costs, I know for a lot of the apparel guys, the weaker dollar has hurt the input costs, it sounds like that’s been the case for you as well.
I think we’re all dealing with an increase in product sourcing costs driven by you can put them in points, the currency strength of foreign currencies against the dollar, the commodity costs starting with oil and moving to raw materials and piece goods which are all being impacted and dealing with all of the social issues and what’s going on in China from a factory point of view with the number of factories that have closed and the pressures that are all going on around the world.
So clearly we are seeing product cost increases for spring 2009. I would characterize them that on average that it’ll be in the 3% to 6% range for product costs. Our goal, depending on the product category and depending on the brand, to take our MSRPs up and to try to promote off of a higher MSRP and to increase our average unit retails out the door. That could be a challenge in this environment so clearly next year we might see some gross margin pressure. But I think it’s manageable in light of where we are, our diverse sourcing mix and how we would, and the ability particularly in some of our brands, particularly Calvin Klein to really pass along the price increases.
Omar Saad – Credit Suisse
On the acquisition front, what are your views there now, heard your name come up a couple of different times out there in the marketplace. Do you think now is a good time to be buying some of these brands that might be for sale out there, you still looking for strategic bolt-on acquisitions or given the environment are you going to take the pedal off the gas and stay focused on your business?
I think, again, if you could find the right acquisition and the right brand, this is a great time to make an acquisition. If you have a balance sheet that’s strong and you have cash and you clearly have debt capacity to make acquisitions, we continue to be active in looking. We’re not taking the foot off the gas but we’re also being disciplined in valuations and what people believe their businesses are worth have not come inline with where valuations are today. So that’s an ongoing challenge.
I think the market is more active in looking and seeing more opportunities but you really haven’t seen a whole lot of acquisitions announced either. So there’s a lot of disciplined approach going on. We’re being very disciplined at the things we do look at and it has to make strategic sense and it has to be a strong brand that fits into our portfolio.
Your next question comes from the line of Sean Naughton – Piper Jaffray
Sean Naughton – Piper Jaffray
On the sourcing, you were discussing possibly 3% to 6% on product costs overall depending on which particular product, is it possible to breakout, are you seeing higher inflation costs on the footwear versus the apparel for next year?
Leather is a major challenge and there’s a good portion of our line in footwear that’s totally leather based and that’s probably one of the areas where there’s the greatest inflation going on. Our exposure in the footwear area, Bass represents just about 10% of our volume, about 40% of that is done in apparel and accessories. So on an overall basis for us as a company; it’s a challenge for the Bass brand it’s not that significant an issue for us overall.
Sean Naughton – Piper Jaffray
On the outlet business, from a regional standpoint have you seen any new areas coming under stress domestically, clearly people have talked about Florida, California and some of the housing impact in the States, but are there new areas that you’re seeing some additional challenges on the heritage businesses?
No, the toughest markets continue to be Florida and Southern California and that continues. We’ve actually seen some improvement in those markets in the last 45 days but I think part of that [inaudible].
Sean Naughton – Piper Jaffray
And the CK license for the women’s Better sportswear, you said that could be a potentially a $200 million wholesale brand, where is that currently today and what type of growth rate could potentially be in that?
That business today is about a $40 million business. It’s very underdeveloped and I think it’s possible to get to $150 million to $200 million over the next five years.
Your final question comes from the line of Brad Stephens – Morgan, Keegan
Brad Stephens – Morgan, Keegan
Could you give some color on the merchandise margin assumptions for Q3 and Q4 and then just within the channels of wholesale and retail and the puts and takes year-over-year and then on your dress shirts and dress furnishing segment, what you’re seeing going on there given the softening employment picture, are you seeing trading down?
On the margins, we were planning our gross margins on a business by business basis up about 10 to 30 basis points. I think we’re being pretty conservative there given the cleanliness of the inventory. That’s about where it’s being planned.
Brad Stephens – Morgan, Keegan
On the dress shirts and dress furnishings, you have a variety of price points, are you seeing people trade down, what are you seeing in that channel?
We’re seeing strength across all channels and all customers. Our three largest accounts, Macy’s, JCPenney and Kohl’s are enjoying significant increases in business and that does span the spectrum of moderate price brands to the better price brands, so we’re seeing actually in the dress furnishings category outperformance to the store and to the men’s category.
Brad Stephens – Morgan, Keegan
Is there any trading down within that?
We don’t see it. We see our core brands performing well and we see our better brands performing well; Calvin Klein, Kenneth Cole, the new launch of DKNY, everywhere you go in our inventory of brands, we’re seeing positive performance.
That is all the questions we have today; Mr. Chirico I’ll turn the conference back to you for any additional or closing remarks.
Thank you all for joining us and we look forward to speaking to you on our third quarter press release. Have a great day.
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