Warnaco Group, Inc. Business Update Call Transcript

| About: PVH Corp. (PVH)

Warnaco Group, Inc. (WRNC) Business Update Call April 2, 2008 9:00 AM ET


Deborah Abraham – VP Investor Relations

Joseph R. Gromek – President, Chief Executive Officer & Director

Lawrence R. Rutkowski – Chief Financial Officer & Executive Vice President

Helen McCluskey – President Intimate Apparel Group

Frank Tworecke – President Sportswear Group

Stanley P. Silverstein – Executive VP International Strategy & Business Development

Deborah Abraham

Good morning. Thanks for joining us. Welcome to Warnaco’s 2008 annual investor day. We’re looking forward to some good conversation. Before we get started this morning we do have some forward-looking statements that I need to read. Certain statements in the following presentation regarding Warnaco’s business operations may constitute forward-looking statements as defined by the Securities & Exchange Commission. Such statements are not historical facts but are predictions about the future which inherently involve risk and uncertainties and these risks and uncertainties could cause actual results to differ from those contained in the forward-looking statements. We urge investors to read the description and discussion of these risks that are contained on Slide 90 actually of your books in this presentation as well as in the company’s annual and quarterly SEC filings.

Before I turn it over to Joe I wanted to make a couple of quick comments. One, we will have a question and answer session obviously at the end of the prepared remarks. But, we’re going to be sharing with you actually some five year compounded growth rates this morning and we just want to make sure that while you realize that these are five year compounded rates that we would expect that they could vary year-to-year. And additionally, in compiling this five year strategy we built it based on the current state of the economy and exchange rates and obviously all of that could be subject to change.

With that, let me turn it over to Joe Gromek.

Joseph R. Gromek

Good morning everyone. In terms of the agenda today, I’ll begin with an overview of our company and then speak specifically about the Calvin Klein opportunity that Warnaco has. Larry will take you through the financials. Our group presidents Helen and Frank will discuss their Calvin Klein initiatives and Stanley Silverstein, our EVP of International Strategy and Business Development will give you a global perspective. We’ll follow that up with a question and answer session. In the front row today on my far right we have a gentleman that you have probably not met before, it’s Charlie Perrin, he’s the Chairman of our board. Please feel free to converse with Charlie at the end of the meeting. I think he loves the business, he loves Warnaco and he’s very knowledgeable about our company.

Before we get started about a year ago at the urging of the board we conducted a strategic review of all of our businesses and brands and that led us to take certain actions over the course of the last six months which included the exiting of Owen Manufacturing, the divestiture of certain businesses and the exit from certain businesses which again, puts us in a very different place. In that process we also looked at in terms of the existing brands that we will maintain over a five year horizon. So, we will exposure for targets that we set over the five year horizon. Remember, that these are targets some of them we may hit in four years, some may take six or seven years for us to accomplish but typically what we measure we achieve.

Moving forward and taking a look at Warnaco today. We’re a $1.8 billion company. Our revenues grew last year at about 13%. We had an operating income around 9.3%. Several years ago we chatted about our long term objective for operating income and we set the bar at 10%. Today you’re going to hear some new numbers. We think that 2008 is the year that we will achieve that 10% operating income margin and we will set new objectives for ourselves. In looking at our business today Calvin Klein represents over two thirds of our revenue, north of $1.2 billion. Our legacy brands which include Speedo, Chaps and core intimate apparel make up the balance of that. In terms of our mix domestic versus international, about 48% of our business comes from outside of the US today and 52% is domestic. So we’ve seen significant movement here over the last several years. Three years ago we were at 27% international, today we’re at 48%. In terms of our mix wholesale to resale Warnaco was always a wholesale company. Five years out we were 99% wholesale, looking at three years ago we did 4% retail, today we’re at 18% retail and growing. In terms of our portfolio, our story revolves around Calvin Klein, $1.2 billion of revenue. The balance of the $600 million is made up of Speedo at $250 million, Chaps at $200 million and core intimate apparel at $150 million.

Currently, we’re well diversified and well positioned international with 48% of our business coming outside of the US. On a wholesale basis we sell the best of the best around the world. In Canada we sell the Bay and Sears, in Mexico we sell Liverpool, in the UK we’re with Harrods, Harvey & Nichols, House of Fraser and Selfridges, in France Galeries Lafayette, in Spain we sell in El Corte Ingles, in Italy we’re with Coin and La Rinascente and in Korea we’re with Lotte and Shinsegae. In terms of the mass merchandiser membership clubs and value retailers, they represent approximately 19% of our revenue. Owned retail is at 18% and the department store channel, US department stores today represent 15% of Warnaco revenue. No single account hits the 10% threshold at this point in time so we’re really not very dependent on any singular account or in fact channel. Specialty retailers represent about 9%, this is heavily dominated by the sporting goods chains like Dicks with our Speedo brand. Lastly, chain stores represent about 8% of our total revenue Kohls and Pennys are the major players here.

Flipping to the next slide you may want to look at page six because it might be difficult to read but basically we’re looking at total shareholder return over a five year horizon and a one year horizon. Looking at five years we’re very near the top of the chart and Guess hit the ball out of the park. If you look at our performance on a 52 week basis we are at the top of the charts over the last year. Our shareholders have certainly benefitted in a significant way from the performance of the company.

Now, let’s take a look ahead at Warnaco. Over the next five years our target is to grow the Calvin Klein businesses to become 75% of total revenue. The balance with the legacy brands would be at 25%. Remember here I’m speaking total organic business. This is all organic growth. Internationally, we will grow from 48% currently to 60% international penetration and our owned retail business will grow from its existing 18% up to 30% over the next five years. Looking forward at our strategy, our strategy is basically to double the revenue of Calvin Klein from $1.2 billion. We will leverage the international infrastructure that we currently have in place and we will maximize the profitability of our legacy brands focusing on profitability with Speedo, core intimates and our Chaps brand.

So Calvin Klein, we’re targeting $2.4 billion over the next five years. I think that the important factor here is to think about the awareness of the Calvin Klein brand around the globe. Wherever we trade it seems that that awareness factor is in the high 90 percentile. I saw something over the weekend in terms of the India market. In India there was a survey of luxury brands, many of you may also have seen it, Calvin Klein came in second, tied for second. Gucci was considered by that survey the most widely recognized luxury brand followed by Calvin Klein which was tied with Chanel. Now, when you think about the products that we sell we are affordable luxury because we are selling jeans which are better priced, we’re selling underwear which is better priced and accessories which are better priced which puts us in a very enviable position as we continue to exploit the globe for our growth.

Looking at the Calvin Klein businesses as they break down the jeans wear business is our largest segment and it will grow over a five year horizon from $700 million to north of $1.2 billion. That will be followed by our underwear business which we have a plan to double over the five year horizon. It’s currently at about half a billion dollars and we will approach $1 billion. Our newly acquired rights to some accessories in golf and ecommerce businesses will generate approximately $150 of addition revenue. Calvin Klein accessories will grow to $100 million and our swimwear business should be in the $50 million range. What will be the drivers for this strategy of Calvin Klein doubling? Clearly, there are two factors that we will focus on. The major factors are international expansion and our continued drive in terms of our own retail stores. Additionally, we will achieve that $150 million from the category extensions that I just mentioned.

I think perhaps the greatest competitive advantage or strategic advantage that Warnaco has today is the international infrastructure that we currently have in place. We have regional managers across the globe and country managers which are supporting the growth of the Calvin Klein initiative both at wholesale and at retail. This puts us in a very different place from many of our peers. We do have a great deal of white space still to be conquered. We could look at the developing markets of China, Russia, India as well as Latin America but we could also look at some of the developed markets where we continue to have a great opportunity. I think specifically in Europe, the German market where we have a very low penetration. I think in Asia, in the Japanese market where we also have basically no business today so, tremendous opportunity, a great deal of white space for the Calvin Klein brand. 60% of our business is targeted to be international. Larry will go in to the profitability of what occurs in our international businesses. They are highly profitable and they are the generators of the profit success of Warnaco.

We look at the bar chart here you will see that our international businesses are going to grow by $1 billion from $900 million to $1.9 billion. That is our five year target. In terms of geographies, they’re pretty much balanced, we might do slightly better is Asia but the growth is fairly consistent. A compounded growth rate here is approximately 16%. A large part of our international growth with come from our direct-to-consumer initiative, our owned retail which is targeted to be 30% of total revenue over the next five years. When we look at how that will occur we will grow the business from slightly north of $300 million to over $900 million. That’s an annual compounded growth rate of about 20%. On a comp store basis, we’re projecting our comp stores to be in the 4 to 6% range. We’re doing considerably better than that right now. I think the last time we spoke to you we were in the 10% range for 2007.

In terms of door count and square footage we should grow the company from the 740 doors to somewhere in the vicinity of 1,100 doors. That will add over 400,000 square feet of selling space. Typically it costs us about $200 a foot to build out a store so we would over a five year window be looking at spending somewhere north of $80 million on cap ex in terms of store square footage. Again, it’s going to come across the board with heavy penetration coming from the Asia market. Just taking a quick look at the economics of what a store looks like for us. Typically, these stores generate about $1,000 per square foot. They achieve profitability within the first 12 months. Four wall profit contribution at the end of the first – beginning of this year too might make more sense is about 20%. And, we talked about the cost to build it out.

Additionally, when we look at the new category extension, the combination of retail accessories and accessory stores in Europe and Asia, they should generate about two thirds of the incremental $150 million that we just acquired. The balance would come from the golf initiative, we’re off to a quick start there and we think there’s a great opportunity in Korea, Hong Kong and in China to sell Calvin Klein golf wear.

Our legacy brands are planned to grow modestly over the next five years. Compounded growth rate is about 3%, slightly less than 3% and will be growing from somewhere near $600 million to approximately $700 million. The real story here is profitability and we will continue to focus on the profitability of the Speedo brand of the core intimate apparel business and the Chaps brand. These are important businesses for us. They are important because they provide the capital to allow us to continue to exploit the Calvin Klein initiative so we believe very much in these brands.

When we look out five years Warnaco will be north of $3 billion in revenue and our target, again our target is a compounded annual growth rate in the double digit area north of 10%. So our top line is going to grow at approximately 11%. In terms of our bottom line our operating income is projected to grow at a compounded rate of about 18% and compounded our EPS rate should grow beyond 20%. Larry and the group presidents will provide more detail in regard to how that all works out.

Before I pass the baton over to Larry I’d just like to add one last factor and that is that our business will generate a good deal of cash over the next five years. Currently, we look at our balance sheet, we have a very powerful balance sheet so today we are very well positioned to be able to support a strategic acquisition that would leverage the infrastructure that we currently have in place globally. That’s the key for us, that whatever we would look at in terms of a strategic acquisition would take full advantage of our global infrastructure and continue to grow our business on a global basis. With that, we have time in terms of that initiative. We’re prepared now but over the next 12 to 36 months I think it’s something that would be obviously very, very high on our radar screen.

Lawrence R. Rutkowski

Good morning everyone. For the past several years we demonstrated a consistent record of growth in our key metrics as demonstrated on page 23. First, our reported net revenues were $1.3 billion in 2005 and grew to in excess of $1.8 billion in 2007 or an average growth rate of approximately 19%. This is primarily a result of the international revenues growing from $326 million to approximately $900 million driven significantly by the acquisition of Calvin Klein Jeans in Europe and Asia. Second, on an as adjusted basis our gross margins expanded from 33.6% in 2005 to over 42% in 2007 or an increase of 840 basis points with significant contributions to gross margins coming from our sourcing initiatives and the mix of international and direct-to-consumer businesses. Third, our operating margin on an as adjusted basis improved from 6.9% in 2005 to 9.2% in 2007 or 230 basis point improvement. Fourth, as for our earnings per share on a continued operations diluted basis we reported $0.94 per diluted share in 2005 and reported $2.26 on a diluted per share as adjusted basis for 2007 excluding pension income, restructuring expense and adjusting for discontinued operations.

Turning to our projected revenue targets we see an opportunity to grow our consolidated top line revenues by approximately 11% compounded annual growth rate over the next five years. This is a long term target and any given year may differ. As a result, we are targeting to grow our revenues from just over $1.8 billion in 2007 to approximately $3.1 billion in the next five years. As Joe mentioned, our international and direct-to-consumer initiatives are the key drivers to the targeted revenue growth with international having a targeted compounded annual growth rate of approximately 16% in our direct-to-consumer businesses compounded annual growth rate in excess of 20%.

Turning to our operating margin improvements whereas we’ve been focused and have achieved a significant improvement in our operating margin bringing it to 9.2% by the end of 2007 on an as adjusted basis as this chart demonstrates we still have an opportunity for further enhancements in our operating margins by targeting the best in class of our competitors several of which you can see below have achieved low teen type operating margins on a consistent basis. Therefore, looking forward to our operating margin opportunities in the next five years we see an opportunity to improve our operating margins to the low teens. Much of this increase will be driven by the mix and the growth of our international and direct-to-consumer businesses which in 2007 both delivered operating margins in excess of 15%. Therefore, if we successfully execute on our targeted initiatives we have the opportunity to grow our operating income by approximately 18% compounded annually.

Turning to our international business for the past several years we’ve demonstrated double digit top line organic growth with a significant increase in the profitability of our international businesses whereas we are targeting mid teen compounded annual growth in our international revenues we see an opportunity to grow our international operating income by approximately a 9% compounded growth rate. Much of this growth will come from Asia, Latin America and new territories along with a contribution from the newly expanded product offerings. In 2008 we are continuing to integrate our European platform especially in the area of the back offices, logistics and distribution and we see further opportunities to improve global efficiencies over time.

Turning to our direct consumer businesses prior to 2005 the direct-to-consumer businesses represented less than 5% of the company’s revenues and did not have the meaningful contribution to our profits. Last year the direct-to-consumer businesses represent 18% of the total company’s sales and contributed over $50 million to our operating income. As Joe indicated, we have an opportunity to grow this part of our business over 30% of the company sales by 2012 or approximately a 20% compounded annual growth rate in our retail revenues. Since we are targeting a four wall contribution margin of 20% or greater of our retail businesses we have the potential to grow our related operating income by 23% compounded annually.

Turning to the next chart ultimately our focus is to continue to drive for improvements in our earnings per share. With operating income targeted improvement 18% on an average annual basis we see the opportunity to grow our earnings per share on a continuing operations diluted basis by 20% or more due to the greater earnings growth in international favorable tax jurisdictions and by growing the free cash flow being generated by our operations and the related interest income that will result.

Turning to the next chart on page 30 in terms of our cash flow the operations are expected to generate a significant amount of free cash flow over the next five years. In 2007 we ended the year with cash of $192 million and approximately $366 million of total debt or approximately $170 million of net debt. Therefore, our net debt leverage ratio was less than one times EBITDA. We are targeting to generate up to $1 billion accumulative free cash flow over the next five years. In terms of use of this cash we are targeting four key areas: strategic acquisitions, reinvestment in the business, debt reductions and continued share repurchases. Although we’ll continue to be prudent in our use of cash with up to $1 billion accumulative free cash flow being generated we intend to be opportunistic regarding a strategic acquisition over the approximate next 12 to 36 month period.

Turning to the next page currently in terms of our global infrastructure we operate and sell in more than 100 countries. We have over 2,300 international employees with 1,100 in Europe, 800 in Asia including our global sourcing operations, approximately 400 in Canada and Latin America. In terms of our key country platforms we are in all the major geographies and have centers of operations in London, Hong Kong, Seoul, Beijing, Shanghai, Montreal, Mexico City, Florence and Holland. And, we remain committed to our financial disciplined approach towards acquisitions and towards conservative capitalization plans. Therefore, we’ll be targeting a strategic application of a global lifestyle brand which allows us to leverage our core competencies in this global platform.

Now, I’d like to turn the call over to Helen.

Helen McCluskey

Good morning everybody. We believe there are opportunities in all of our intimate apparel and swimwear businesses. Consistent with what you’ve heard this morning and consistent with the overall Calvin Klein goal Joe outlined there is significant revenue potential in Calvin Klein underwear which I’ll discuss in detail shortly and in Calvin Klein swimwear. While we expect low to moderate revenue growth in our largely US based core intimates Speedo businesses there is still considerable opportunity to build their bottom line.

I’m really excited to discuss Calvin Klein underwear with you today and hopefully you won’t get tired of hearing the story. We’re very pleased with the progress that we made in 2007 but we still believe there’s a lot of room to grow. As with the Calvin Klein vision our goal is to nearly double our revenue approaching $1 billion by 2012. Our growth will come in multiple ways as highlighted earlier we still have a lot of white space geographically. Today 60% of our business is done outside of the US and with the strength of the Warnaco platform we expect that number to grow to nearly 75% over time by developing countries like Russia, China and Brazil as well as continuing to grow in our existing more mature regions. We’ll continue to build our direct-to-consumer business in all geographies including the US which largely will be through an ecommerce initiative. Currently, 25% of our business is done direct and we’re driving to 35 to 40%.

I’ll spend my time today with you talking about the last point which is building and extending the brand. Calvin Klein has very high awareness around the world and very broad appeal that has done nothing but increase with time. So why do we believe we have so much untapped potential? The core of our confidence and believe is that Calvin Klein underwear holds a unique and desirable position in the marketplace which I tried to illustrate in this graph. Only we can deliver all of the functional requirements that are needed to be successful in this category in very innovative ways with launches like Pro Stretch, Body, Naked, Steel and Perfectly Fit and combine that with the power of the Calvin Klein brand which is as relevant and modern today as it was 40 years ago when it was introduced. Calvin Klein is an aspirational brand, we are innovators in the category. This enables us to deliver the highest emotional consumer connection while exceeding their expectations on product performance. We believe that it’s this combination of the desirability of the brand or the emotional quotient which is on the bottom access here with the physical properties or the functionality on the Y access of our product that makes us a brand that consumers want and need. That enables us to grow and affords us opportunities for further growth.

So, how do we do that? Our approach is a fully integrated one that starts with great product, you can see it at the base of the pyramid here. Combine that with impactful communication and presentation in stores surrounded by activities that create excitement and interest with both consumers and our customers. That creates buzz worthy press which is the public relations initiative and we support all of that with our iconic advertising that has become our heritage and defines us.

Looking at Calvin Klein Steel our fall line launched in 2007 is now our gold standard for how we plan to launch going forward. The launch exceeded our expectations. We shipped over 1 million units of product in four months generating 8% of our total year’s revenue again, in just a short four months time frame. Going back to the pyramid it all started with great product, we combined fashion forward aesthetics that you can see here with extraordinary comfort features including a proprietary fabric. Packaging, we presented in store with new packaging and we also offered a novel overlay celebrating our 25th anniversary. The execution at retail around the world was outstanding, it drove traffic and helped to generate the great results. We drew customers in with in store promotions and with attention getting consumer events around the world you can see our Steel Box Peep Show which was in Asia, and the Hummer Tour that we launched in Europe. Celebrities from Paris Hilton to Ashton Kutcher were caught showing their Calvin and no one looked better than our larger than life man of Steel Djimon Hounsou which was our advertising campaign. All of that led to the incredible results that we experienced in 2007.

So, what do we do to keep it going? We hold a leadership position in men’s around the world and will continue to drive that through innovation. We just recently launched Tech Active and Tech Cool which you’ll get to see upstairs and we’re off to a great start with one or two weeks of selling behind us. We’ll follow that up with our organic initiative Calvin Klein Naturals and then our big news for fall is refreshing one of our core major franchises in Body with new programs and new launch that you’ll see upstairs as well.

We have an enormous opportunity in our women’s business. Our women’s business is strong and growing but relatively under developed. Our focus is on speaking to a much larger audience by addressing geographical differences in both needs and the competitive set by increasing our awareness through increased investment in advertising and in store initiatives and offering product that covers more body types talking to a broader audience. I wanted to illustrate the opportunity that we have in women’s. Today our men’s and women’s business is almost equal. Men’s is about 55% of our total and they’re growing at equal rates. We hold a commanding share in men’s and less so in women’s. If you look to the next slide please you can see the difference in category size. Women’s category in total is nearly three times the size of men so that illustrates while we have opportunity to grow in men’s we have significant opportunity to grow in women’s. Admittedly women’s is a more complex and a much more competitive and fragment market but given the size of the market and the power of our brand and our strength we believe that there’s significant growth potential for us ahead.

We have the opportunity to track many, many more women to our brand by offering a broader assortment so I tried to illustrate just sort of the history. On the left side of this chart you see the way that the market breaks out and we’ve broken the bra market out in four segments petite, average figure, full busted and full figure. If you look at our history, before the launch of Perfectly Fit, Calvin Klein underwear was positioned in the relatively small segment of the marketplace. We had petite share and a very small part of the average market. With the launch of Perfectly Fit we extended to a much broader much more universally appealing audience in the average fit segment which also happens to be the largest segment at 43% of the market. Our plans in going forward are to compliment Perfectly Fit and 265 which is positioned in our core heritage with new launches coming up. We’ll be launching Asian Fit in fall of this year to really tackle China and all of our Asian marketplaces and further expand our penetration in petites and importantly our big news for fall is on Seductive Comfort which is a launch that is targeted at the full busted segment. Perfectly Fit established the platform and the foundation that allows us to extend this brand so we will be going after the full busted segment with Seductive Comfort which will then leverage into full figured as we go further into 2009 and 2010 to cover the full spectrum of body types and audiences out there in the marketplace.

So, our big news for fall as I said is Seductive Comfort. We’ll combine the aesthetics of Calvin Klein with superior features which you’ll get to see upstairs and extended product comfort and support beyond our current Perfectly Fit audience. We’ll do that by again modeling what we launched with Steel so following our pyramid of what we believe is an integrated and important part of our success. We’ll increase awareness using this integrated approach and Steel as our model. It starts again as I said before with great product. We’re offering three new styles in Seductive Comfort and we’ll get to show you all of that in the showroom upstairs. We’ll be communicating more benefits and features that we have historically in the past but in a very sophisticated and very Calvin way. We’ll make a statement at retail supported with shops and in store visuals. Then, the last part of the pyramid, we are still in process of working on our in store events, our consumer events, our PR initiative and finally our advertising campaign which as I said earlier has been our heritage and it definitely defines us.

If you look at our history, we have a history of using celebrities whether it’s celebrities like Christy Turlington, Hillary Swank or creating celebrities like Kate Moss and Marky Mark. So, I would like to take this time to introduce you to the new face of Calvin Klein underwear. [video presentation] I can’t wait for you to see it either. We did just come off of the shoot with Eva, we’re very excited about her representing the brand. We signed an extended contract with her. We believe that Eva really embodies the diversity of Calvin Klein underwear, she demonstrates that. We also think that by using her she clearly communicates the message of our reach and broadening our appeal to a much wider audience of universally all women. Or, to quote our marketing team upstairs, “To get our message out from small girls to all girls.” That’s the message that we’re working on internally. There’ll be a lot more to come as we firm up our plans behind Seductive Comfort and again, you’ll get to see that upstairs.

To wrap up on Calvin Klein underwear my intent today was to leave you with this message and that is that we believe Calvin Klein underwear had significant room to grow. By fully leveraging the power of the brand with the innovation we provide, the talent of our organization, the global infrastructure and the direct-to-consumer initiative of Warnaco, we believe we can reach that billion dollar goal.

Okay, rounding out our intimate apparel group our target for the core intimates is to continue to improve our profitability. Certainly, we’ve made a lot of progress over the last three years. We finally crossed that double digit mark on operating margin in 2007 and we expect to achieve mid teens over the course of the next five years. We also expect relatively moderate growth. This is a very difficult market segment right now. 2007 the total overall marketplace was down but I am very happy to say that both Warner’s and Olga enjoyed success in 2007 and that continues. We experienced expanded distribution getting back in JC Penny and a number of tests is some other major retail chains and had market share gains on both the businesses. We’ll continue to drive that going forward. We’ll drive Warner’s growth which has been all about wire free in particular with our launch of Elements of Bliss into the underwire segment. So we’ll be expanding the Elements of Bliss concept into underwire which is a very important initiative for us and happens to be the largest segment of the market. Olga will continue to focus on full figure. We really simplified the business in 2007 eliminating everything but full figure from the franchise. That is a large and growing piece of the marketplace. We are getting a lot of traction right now expanding our fixtures that are on the floor with Olga as well as Warner’s. Our team actually calculated this point in time this year versus last year we now have 5,200 more fixtures of Warner’s and Olga at retail than we had one year ago. That’s quite an accomplishment in a year that we’re really proud of again, in a category that’s not particularly robust.

One of the opportunities that we do have is to maximize our current distribution so we’re tapping out on distribution expansion. We are implementing a new system that allows us to micro merchandise our assortments at the door level to get as much velocity and as much revenue out per door as we can. We’re looking at new channel opportunities. We are currently not penetrated in the mass channel so that’s still an outstanding opportunity for us and we will continue to work on our processes. This is what got us to 10% operating margin in 2007 in addition to some revenue growth. We’ll continue to drive that going forward to make sure that we are efficient as possible and we are as fast as possible again, to maximize and optimize our opportunity in a market segment that is pretty tough.

Looking at swimwear on Speedo 2007 clearly was a disappointing year for us. I think the message that I would leave you today is that it is very simple we will return this business to our historic profit levels which is targeting a high teen operating margin over the course of the next five years. We’ll do that by simplifying the business. The comparison here is not dissimilar to the intimate apparel business that we walked into three years ago. Our focus here will be on swim so we will concentrate our efforts on those initiatives that reinforce our position as the world’s best swim brand. We’ll continue to dominate in the competitive swim area, we have a leading share in that category in both swim and goggles and I’m sure you’ve all read the press lately about our launch of LZR Racer which has broken 14 worldwide records in a four week timeframe. So, we will certainly exploit all of the PR that’s associated with that. This is the world’s fastest swimsuit there is no question. And, we’ll be exploiting our association with the Olympics as well. So we’ll take advantage of all those initiatives this year. We’ll also leverage then that position in competitive swim into fashion so we will extend into fashion swim but it will not be for the sake of fashion it will be with a point of difference. So we’ll provide fashion with a point of view with a purpose whether it’s quick dry, UV, all of the innovative functionalities that we use in competitive swim we will leverage into the fashion segment. And importantly, and again very similarly to intimate apparel three years ago, we will focus on process improvement here. We have a huge opportunity to improve our inventory management, that was one of our biggest drains in 2007, we will correct that going forward and use that as a platform then to improve our operating margins and we’re focusing on speed to market as well here in product development.

So while nether the story on core intimates or Speedo is as sexy as the one I put out on Calvin Klein underwear, we do believe they play a contributing role in Warnaco’s overall goals on improving and driving profitability. That profitability improvement will enable us to invest behind Calvin Klein underwear and reach our full potential on that business.

So, I will turn it over to our rose between two thorns here, Frank.

Frank Tworecke

Good morning everyone. If you turn to the next slide as in Helen’s presentation the Calvin Klein jeans business has just as significant opportunity for revenue growth as we have in underwear. As you can see, we’re coming close to doubling that business from just over $700 million in 2007 to over $1,000,400,000 at the end of 2012 which represents a 15% compounded annual growth rate and the business is comprised of the jeans business, the golf business, the accessory business and the ecommerce business.

The growth strategies to achieve our objectives here again, not dissimilar to what we’re doing in our other businesses, we have significant opportunity in expanding our business geographically. Both Europe, Asia, Latin America, Canada, Mexico affords us a significant opportunity. As you know, last year we increased our international business by over 40%. Direct-to-consumer which last year increased by 39% affords us another avenue for revenue growth. We also have opportunity in category expansion, different opportunities by geography. In the denim category we have opportunities to impact that category and that penetration along with the international segment of the business. Accessories, significant growth opportunities for us on a go forward basis and we just acquired the rights for golf in Asia and we believe that has significant growth opportunities. All of it supported by the iconic and tense marketing efforts that are put behind the Calvin Klein brand.

Our first opportunity for growth is in the geographic arena. If you take a look in 2007 our international business represented 68% of our total revenue. As we continue to impact and take advantage of the opportunities that exist not only in a comparable geographies but in new geographies or white space that we see in the international arena. At the end of 2012 we will see our business in Calvin Klein jeans to be penetrated 78% internationally. Direct-to-consumer also another significant opportunity for us. That will be driven by a combination of both owned stores and concessions. In 2007 it represented 27% of our business just over $200 million. At the end of 2012 we see that being nearly a $500 million business or 36% of our total business in Calvin Klein jeans will be done in direct-to-consumer. Interestingly enough our opportunities are somewhat divergent depending on the geographies. If you take a look at the Asia business we are approximately 75% retail. If you take a look at our European platform we’re somewhere around 25% retail. Both of those afford us opportunities for growth in both of those regions on a direct-to-consumer basis.

We also said that category expansion was an opportunity for future revenue growth. Our first and most significant one is accessories. When we acquired our international business from Fingen two years ago accessories was about a $15 million business. We project that business to be over $150 million by 2012. We said that we would get to $100 million by the end of 2010 and with the additional rights at retail for the accessory business we believe that opportunity will go to $150 million in a combination of both wholesale and retail. Golf apparel is also another opportunity for us in Asia. We believe that’s nearly a $50 million opportunity with significant opportunity in Korea, China and Japan for expansion.

As far as denim is concerned as a category within the Calvin Klein Jeans business if you take a look at this chart you’ll see that the jean segment of our business because we are a lifestyle brand that sells many categories of product, the denim category in the US and in Asia represents about 35% of our business. When we get to Europe which is our biggest geography it’s only penetrated at about 18% so we believe we have a significant opportunity to grow that category of product in Europe. In the United States we have a different opportunity. In the US although we’re penetrated at 35% the market segment that is growing the fastest and is now as big as the other segments by price point is the over $75 price point of denim. Our primary price zone for denim sales in the US is between $35 and $75 that is where we do 95% of our business. We believe that we have an opportunity between $75 and $100 to impact that business so it would represent over 15% of our business. We are currently in the process of shipping product in that price zone to our customers and are getting some very favorable results. So, depending on the geography denim affords us opportunities somewhat different depending on the geography but it’s a significant category opportunity for the Calvin Klein Jeans business.

From a marketing perspective we have a multitude of avenues of bringing our name to the consumer between print, outdoor, event sponsorships, editorial credits and celebrity seatings. If you take a look we are very well represented in all the major magazines both here in the US and internationally. From an outdoor perspective we have many billboards here again, not only in the US but internationally. If you take a look at the top left hand part of the billboard, this is the [Howston] Street billboard and it shows Kate Bosworth who is our celebrity that we have signed for the spring season to represent the Calvin Klein Jeans brand. As it comes to event sponsorships we had last week the opening of the Movie 21 where Kate came in along with Garrett Neff who is also the face for Calvin Klein fragrance and they both came in for the opening of the movie. Marketing initiatives we have magazines and product placements throughout many of the magazines so we have a very varied approach to bringing the brand and the product to the consumer not only in the US but also in our international geographies.

Not only does Calvin Klein have an opportunity on the revenue side we also believe and we know that we have a significant opportunity to raise the profitability of the brand while we’re growing revenue. Our first and most important opportunity that we are well underway with is the leveraging of our shared services in our European geography. We have a sourcing office in Asia, we had been sourcing our product for Calvin Klein Jeans in Europe and Asia through a European platform. We’re currently in the process of integrating those sourcing platforms and as a result not only can we become more efficient in the process but certainly be able to reduce costs and increase our margins.

From a distribution perspective we have two distribution platforms in Italy servicing the Calvin Klein jean business. We also have a distribution facility in [Klunder] Holland. We’re right in the process right now of developing a platform for making a more efficient model for product distribution, lowering the cost per unit being shipped out, that is currently also in process. From an accounting perspective we had separate accounting back office functions in the Italian platform also in some other countries and we’re now in that process of taking that discipline and centralizing it in [Klunder]. The same goes for the IT and the customer service segments of the business. So, from an SG&A perspective we believe we have significant opportunities as we begin to leverage the shared services. [Break in Audio] in the process of making sure that we can focus our energies in establishing a commercial base to our business in Europe as well as having a complete focus to our marketing and merchandise base in Europe. To that end, yesterday we announced the appointment of Thomas [Oxmarker] as the MD of Europe for the commercial piece of the business. He will have all product categories reporting to him so that from a marketing perspective we’re able to leverage common big ideas throughout the world without having segmented presentations of categories that don’t tie and build the brand from a worldwide perspective. So, we have some significant opportunities on the revenue side, very significant opportunities on the profit side so the goal for us of achieving over $1.4 in revenue we feel that we have an avenue to achieve that goal along with the profit opportunities that come along with that.

In the Chaps business we’ve spoken about that this is a profit opportunity for us as a company. This past year in 2007 we reestablished the base of profitability in this business taking it from over 5% operating income to well over 10%. We believe we still have some growth opportunity as it relates to the operating income side of the business. We’re focused on growing the mid tier segment of the business as the middle market department store business is very challenged right now especially in moderate priced sportswear. We do see ourselves as having opportunity to offset any stress that we have in that segment with the growth in the mid tier. We’re continually building the brand equity with our customers as we begin to improve the aesthetics of the product which we have significantly over the last number of years. And, we have invested significantly in presentation of product at retail to customer. If you guys have been in to any of the Kohls stores over the last three to six months we’ve put in a brand new fixture packages and visual package to support products. So, we still view Chaps as an opportunity for us but it is clearly more on the profit side than on significant growth opportunities.

With that I’d like to turn over the presentation to Stanley Silverstein.

Stanley P. Silverstein

International accounted for nearly 50% of our net revenues in 2007 and we would expect that these markets will continue to drive our top line growth. As Joe indicated our target is to double these business by 2012 and on average we would expect to deliver compounded annual revenue growth of 15%. The way we will do this is by growing our direct-to-consumer network which today accounts for 27% of the international markets in 2008 we’ll be adding over 70 direct doors and by widening our geographic reach to developing markets. Again, we’ll be targeting the brick countries of Brazil, Russia, India and China as well as some next tier markets in the Middle East, Vietnam, Argentina and the like. We expect to accomplish all this by leveraging the regional and country platform that we developed in Asia, Europe and the Americas and it’s these platforms that will really support both the organic growth as well as the strategic acquisitions that Joe spoke to.

Looking first to Asia, we generated $250 million in net revenue in 07 up 30%. We’re looking to grow this region at an average of about 18% and I would point out that we’re doing that without a significant contribution from Japan which is really our biggest white space. We continue to look for penetration and productivity gains in our anchor markets of Korea and greater China. Regionally we’re controlling over 300 points of distribution directly and in Asia we’ll be adding over 40 direct doors in 2008. We’ve increased our geographic reach in 07 and into 08 [Break in Audio] in emerging markets such as India and Vietnam and again, in addition to these developing markets we do see important white space in two geographies both Japan and Taiwan where currently partners control businesses of approximately $25 million each.

We registered some quick wins in Asia with our regional and country platform. We centralized leadership team, merchandising team and headquarters and we believe that we can comfortably leverage these new markets as well as other product off this platform. We thought it might be interesting to tell you a little bit about our business in China which is really our fastest growing market. We recorded $35 million in net revenues in 07 up 72% from 2006. We’re targeting 40% growth in 08 and on average we’d expect to grow this country by about 30% annually. We made a strategic decision a couple of years ago to operate directly in tier one cities of Shanghai and Beijing and then we’ve carefully selected retail partners with local real estate or other competence to manage in 42 other cities. We ended the year with over 165 CKU and CKJ doors.

We believe our next slide illustrates really graphically kind of our road map to growth and the way we look at the China market. In the tier one cities of Shanghai and Beijing we operate directly 48 doors with about 20,000 square feet in retail in each of those cities. There are 13 tier two cities behind that which average nine million in population that’s basically two times Los Angeles and significantly larger than capitals such as Milan and Madrid. We currently operate via partners in all of those tier two cities. In addition to the tier one and two cities in China, there are 45 tier three cities with populations of between one and 10 million again, the size of Chicago and Atlanta and Munich and Rome. And there, we participate now in just over about 55% of these markets. It’s our strong belief that we can nearly quadruple the business in China by 2012 as we expand penetration in tier one in three cities and eventually over time we’ll enter tier four cities.

You’ve seen the city penetration and I wanted to give you a little snapshot of our retail footprint. Our door count since 2006 is over 41% and we expect to end 2008 with nearly 250 points of sale. Just to contextualize that position according to their website Diesel was operating 13 stores in China at the end of 07, Tommy had 12 and Guess had 16. I’d point out that even with significant investments that we’ve been making in infrastructure, personnel and marketing in China we today employee over 450 people in China we’re still generating OI margin of over 20% in that country.

Turning to Europe, in 07 we generated $470 million in net revenue up 40% as Frank said from 2006 and we’re target to reaching a billion by 2012 in this region. We will continue to penetrate anchor markets that we have in Italy, Spain and the UK through expansion and store growth. We’re currently operating 420 points of direct distribution and we’ll be adding 20 direct doors in 08. In addition to development in the core Western European countries we’re expanding our reach in Russia, Eastern Europe and the Middle East and as Joe suggested we’re doing that off the regional and country platforms which we believe provide us with a unique competitive advantage. If you recall in 06 when we acquired the CK Jeans business in Europe and Asia we believed that there were significant synergies that we could achieve across some of the geographies and we registered some quick wins in markets like Spain and the UK by exiting inherited relationships with third parties, distribution or agency relationships. Spain is now the second largest market for Calvin Klein Jeans in Europe. So in 2008 we’d expect to continue to execute against that strategy by exiting some third party relationships that we inherited in France, Italy and in Germany.

If you turn to the next slide, like China Russia is growing at a very powerful rate and we operate in this market with an accomplished retail partner. In Russia we recorded $25 million in 07 net revenue doubling from 06 and with a [kager] of 32% we would expect to reach $100 million by 2012. We have a very powerful concentration in Moscow and Saint Petersburg and there are nearly 40 Calvin Klein Jeans, underwear and bridge stores operating today across Russia. As you can see we have substantial representation in tier one cities of Moscow and Saint Petersburg with 22 doors. There are 15 tier two cities, again roughly the size of a Chicago or LA in Russia and we currently are participating in about three quarters of those cities. As with China, our strategy is to expand penetration and productivity in tier one and two cities. We don’t think we’re at all mature there. And, as appropriate, enter tier three cities.

Looking at the next slide with a [kager] of 35% we expect to end 2008 with about 53 doors in Russia. Just again, to contextualize this and frame the competitive landscape according to their website Diesel was operating six stores, Tommy 18 and Guess 21. So, we have a powerful leadership position in this growing market. I’d point out that the $100 million target that we spoke to in Russia is a wholesale number because as we said we’re operating with a partner and that would convert to retail of about $200 to $250 million by 2012. I think over time as we developed confidence and competence in that market we may look to reclaim this high margin high growth market to direct.

Turning now to the Americas we generated $175 million in net revenue in this region up 10% from 06 and we’re targeting to double this business by 2012. We’re generating a very high over 20% OI margin in the region led by strong performance in the largest markets which are Canada and Mexico. We’re accelerating in Latin America our direct-to-consumer development and expect to end the year with 23 new direct doors. In January we increased the stake in a joint venture we organized a few years ago in Brazil to 51% and this joint venture will generate over $20 million in revenue in 08. And, just last month we planted a flag for direct operations in Argentina and we will open our first four doors in that country before the end of the year. As with other regions we do expect to leverage a regional platform in the Americas to support other development and direct development. There are other Latin America countries such as Chile and Colombia that are currently served by partners and we expect over the next couple of years that we will leverage the platform to go direct.

As with China and Russia we thought it might be helpful to give you some visibility to our Brazil strategy. The JV recorded $15 million in net revenues in 07 up 75% from 06 and we expect this business will grow annual on average 25%. We have powerful concentrations in San Paolo and Rio with 11 jeans and underwear doors and together with local partners we’re operating nearly 20 Calvin Klein jeans and underwear stores across Brazil. So, just to conclude looking across Asia, Europe and the Americas we believe we have powerful growth opportunities really in every region and a compelling strategy to achieve these objectives.

Now, I’d like to turn the microphone over to Joe.

Joseph R. Gromek

I think you’ve heard from our team this morning and you can see that we’re excited about our business and the opportunities. So why invest in Warnaco? Clearly, we’ve got a unique business model, we’re global, we’re very well diversified by geography and by channel, we’re grounded in one very powerful brand in terms of Calvin Klein which we think we can double the revenues over the next five years moving to $2.4 billion. All of this is organic growth at this point in time and we have incredible earning potential and the ability obviously to add to our portfolio. Over the last five years I think we’ve demonstrated an ability to create shareholder value.

With that, we appreciate your attention and let’s open up the meeting to questions.

Question-and-Answer Session

Unidentified Analyst

Can you speak to what trends you’re seeing in your sourcing costs generally and cotton specifically?

Joseph R. Gromek

Well, I think we’re operating across a multitude of business categories but basically we’re seeing stress on the costing side. We think 08 we’re pretty well covered. In 09 we’re beginning to feel real pressure so we’ve got to work smarter and different to be able to maintain our margin structure. Over the last three, four, five years we’ve made great progress on our gross margins. If we look back to 2003 we had a 27% gross margin and I think today it’s about 42% so we’ve made tremendous progress there. But, we had a lot of low laying fruit, that low laying fruit is gone. We’re doing things internally in terms of our systems, PVM in terms of on the design side to impact the amount of SKUs that we develop etcetera. So we have initiatives in place but candidly the pricing is becoming more challenging. One other factor, we’ve got another great asset and that is the brand that we’re backing today and that’s Calvin Klein and I think if anywhere there was some pricing elasticity it would be within the Calvin Klein product lines.

Analyst Todd

Joe, I know brand cycles aren’t exactly an exact science but by giving us five year projections what is your view on the brand cycle for Calvin Klein? Do you think it’s just going to be long or do you think it’s going to be relatively bullet proof?

Joseph R. Gromek

Well, I think Calvin Klein in September, I don’t want to steal anybody’s thunder here but I think there’s a major plan for anniversary and I believe it’s the 40th anniversary, 40 years of Calvin Klein. I think as long as the brand is not mismanaged and hopefully you’ve seen this morning what our teams has been able to provide to you in terms of design. We’re as good as the product we create so as long as we continue to be on our game in designing the product, in marketing it in the appropriate fashion and providing the consumer something they really want, this brand can go on a long, long time. Brands that falter typically falter because they’ve been mismanaged, that’s not something that we intend to do.

Analyst Todd

Actually, let me ask this question or pose it to Larry, you provided goals of 11% revenue growth and 20% EPS growth annually and I’m just wondering if you look at 2008 is there any reason why on sort of a lower base year this year should be below those targets?

Lawrence R. Rutkowski

Just in terms of those targets again, this is five year target. We showed that there’s plenty of white space, I think that we said that any given year may differ and so at this point we – we last talked on guidance on February 26th and at this point that guidance for 2008 stands.

Joseph R. Gromek

We’ll update you next month Todd when we announce Q1 results.

Analyst Todd

Are there reasons you can come up with that would make this year lower than that? Then, I have second question. But secondly I just wanted to ask about fx, last year you had some decent fx benefits and I’m wondering if your assumptions going forward your 20% five year, what that assumes for currency fluctuations if anything?

Lawrence R. Rutkowski

Sure Todd, that’s a good question. In terms of foreign exchange and in terms of economic markets we have factored in the slow down we have seen in the US in our current projects. In terms of longer term we’re assuming that global economic environment continues for what we see and what we’re projecting at this point in time. In terms of foreign exchange as you mentioned in 2007 we received about $50 million in revenue benefit and about $10 million or $0.14 of EPS benefit to operating income and EPS. We do hedge now our product cost purchase orders that exist, we hedge about 70% of those because they are locked and denominated in dollars typically. So, for much of 2008 therefore we are protecting the operating margin. It’s difficult to hedge on the top line revenue gross but again, these projects assume a sort of constant dollars and where we’re delivering today does not assume a major swing in currencies.

Joseph R. Gromek

That’s one of the reasons why these are five year targets. So, understand some of them we’ll hit in four, some of them will take us six or seven years to accomplish.

Analyst David

Joe, a question about owned retail, that’s obviously a big part of your growth strategy, you’ve been very successful so far. The industry is littered with companies, manufactures who have been not as successful in retail. I was wondering if you could give us some color as to why you’ve been successful? What are the disciplines? Then maybe Larry you can comment on what our specific return on capital requirements are for opening a store, how you’re benchmarking against those as you open additional tranches of stores each year. Because obviously that’s an area where companies can get in trouble, they expand retails as rapidly as you are.

Joseph R. Gromek

David first we have 740 stores globally today that we operate. We operate 739 outside of the US and one in SoHo. We have one great success story in the United States which at some point in time we would hope to replicate. But, one of the reasons I think we are successful is we are playing in a sandbox that is quite different. We’re in a global sandbox and based on that and in some cases that’s the only means of entry into a market. So being a retailer in some locations there are no department stores to sell so if we want to be in those lands we have to be a retailer. We fortunately have developed an expertise over the last five years and we’re supporting it with acquired talent. I’d like to think between Frank and I we’ve got 80 years of retail experience but I don’t think we could take credit for this. I think the folks around the global are doing a great job.

Lawrence R. Rutkowski

David, in terms of your second portion of the question, we remain very disciplined on every store opening. We review it at the executive level, all key store openings. In terms of those benchmarks we outlined those in the presentation that we are targeting that the revenue per square foot in each of those stores target $1,000 or better. We target that the gross margins needs to be in the mid 60%. We target that the four wall profit of any new store opening after the first two years of operation need to generate at 20% or better four wall profit. In terms of the capital we said that our target is roughly $200 a foot of cap ex in to each of these. And, when we look at the total cost and return on investment we are targeting since we have plenty of opportunities in white space yet, we’re targeting that the return on investment, internal rate of return must be in the high teens on these. Frequently, we reach well north of 20% depending on store-by-store location. I hope that answers the question.

Unidentified Analyst

First of all this was a terrific presentation by the way and I assume that if you met your five year targets in three year targets you’d move on and [inaudible].

Joseph R. Gromek


Unidentified Analyst

Secondly, as far as acquisitions are concerned you alluded to that and I was trying to figure out who would be ideal for you? I’m not sure what kind you’re looking at, if there’s any color that you can add to that, that would be interesting. Then, let me just get in the third one, you didn’t talk at all about personnel, like on these targets would there have to be an increase in headcount or anything like that in the executive area or other areas?

Joseph R. Gromek

First, in terms of acquisitions we are focused on brands that are or have the potential to be global. Our reason for doing this is to be able to leverage this into our international platform. That’s the strength of our company today and that’s what makes us unique. So we would be interested in global lifestyle brands. Obviously sportswear is a great space to be and dual gender is also something that we’ve been successful with to date and allows us leverage as well. In terms of the need to add talent into the business, we’re always involved with that. I think one of the things that we are focusing on is the internal development of people and we’re spending a lot of time, energy and resources on that. We are developing an internal executive training program to bring people into our company on the merchandising and design side, on the management side and also on the finance side. To cover those basis we’ve partnered with different universities in that regard Parsons and FIT on the design side and we’re looking at a program with Wharton actually which we hired our first MBA from Wharton which she’ll start with us this summer and interns as well. So, I think we understand the needs and the requirements of the business. We are a global company so doing things in the US is one aspect but we also have to do these globally. In terms of senior leadership I think our team is in place, we’re very comfortable with our team and we think that we’re in a good place right now.

Unidentified Analyst

Can you talk a little bit about you’ve expanded the Calvin Klein license are there other Calvin Klein licenses that you would like to have or you think will be an area of focus for what you’re doing? I think the second is you talk about a number of different countries, which of these white space countries do you think is the best opportunity [inaudible] five year period for expansion.

Joseph R. Gromek

First, in terms of the licenses, I think there are a couple that are of interest to us from Calvin Klein that are owned by other folks. We were fortunate enough to acquire the jeans license two years ago. When we acquired that business it was approximately $300 million in revenue in 2006 and I think we finished 2008 at $425 million and with nice improvement in profitability as well. That’s a natural for us. I think for me to tell you which ones would probably just raise the price. But, there are some and it’s important for us that they be global licenses. Getting a license for something in the US today is not nearly as appealing unless we’re able to leverage our design resources and our sourcing resources so we would be more interested in international aspects. In terms of the white space maybe my partner down the end might want to take that one.

Stanley P. Silverstein

Again, if you look at our core countries in Asia you’d have to call out Japan. We’re doing about $165 million this year in Korea, as you saw we’re looking for $60 million plus in China and the like. But, Japan where we’re significantly under represented we’re working with a partner, there may be $25 million of jeans or underwear revenue that’s being generated in this market. While it’s a challenging market and will require some investment and some talent I think we would have to believe that is the most important white space as we look at the world today.

Frank Tworecke

There’s one other thing when you talk about white space and that is penetration by category within a country. So, for example if you take a look at our penetration of denim in the Italian geography versus underwear we’re significantly more penetrated in the denim piece of the business versus the underwear piece of the business. When you look at the Spanish market we do twice the business in underwear than we do in denim. So, as you go through by existing geographies we believe there are penetration opportunities that we can leverage our growth one category against the other. So, I think there’s white space in countries we haven’t been in and you might call it opportunities within existing geographies also some white space for growth just by penetrating and leveraging one category off of another.

Stanley P. Silverstein

I think to join into that when we did our five year plan last year we looked at a market like Korea that seems like it’s growing quite powerfully and might be maturing and believe that over the next five years that would grow over $100 million in revenues as we grew the portfolio of jeans, underwear, accessories, kids, golf so as Frank suggests even in developed countries we think there’s a lot of room to run.

Unidentified Analyst

Joe, would you help us understand a little bit the operating margin, the four wall margin target for retail? Is that net of your royalty payment, administrative payment? Are all of the margin targets post or pre that? And, how do we think about this going forward? Does that start to decline as a percentage of sales or is it pretty much fixed no matter where you are?

Lawrence R. Rutkowski

Last year in terms of the retail revenue we reported $337 million of total revenues. You’ll see in our earnings release that we showed just over $50, $51 million of operating income or 15.2% operating margin. That includes the administrative costs that you’re referring to. The four wall profit that we’re referring to is the revenues generated by those stores, it also includes product at cost, not transferred at wholesale we treat and measure those businesses as such. So, we do look at those on what is true contribution. You should think of the 20% or better four wall profit as true contribution margin. So over time, as we continue to drive that retail square footage growth from 80,000 square feet to 90 and 100 we should be able to leverage those administrative costs so there should be a benefit of leveraging that expertise, our relationship with the consumer and the administration costs to improve it. That should ramp that 15% up to a higher number. So that’s one of the reasons why in my segment I talked about that the operating income and margin should grow at a faster rate with the top line targeted revenue compounded annual at 20% but the bottom line operating income growing at 23% and 24.

Unidentified Analyst

A question for Helen, with Speedo to get that back to a high teens margin I guess just with the rationalization of the manufacturing the issues, the steps that you took this past year how quickly and what does that add this year and then how do you get that to a high teens margin going forward? I guess that assumes no shared services, right? That high teens, is that right on a contribution basis?

Helen McCluskey

Yes, it would be before shared services. I think one thing on Speedo that I have to comment on, inventory was a real drain on profitability. So with and I say simply but it’s not simple but with simply improving our ability to control inventory we should have a substantial pickup in operating margin. We loss four points last year so we’ll have an improvement this year. What offsets that is we have an investment behind the Olympics so we will improve our profitability in Speedo this year over last year’s rate while still continuing to invest substantially in the Olympics. So, 09 would be an even stronger year of growth for us.

Unidentified Analyst

[Inaudible – no microphone]

Helen McCluskey

Well, there are pluses and minuses to that. We would expect the margin pick up, I can’t really quantify that this year because there are so many moving parts including inventory obsolesce and other things and we are just working on developing other sources outside of North America because we still do substantial amount of production in Mexico. So, a pickup in terms of true outsourcing going offshore would be in 2010 or beyond.

Unidentified Analyst

A follow up on that one, you just mentioned inventory obsolesce, I think that hit the fourth quarter to $6 or $7 million. In your guidance is there anymore inventory obsolesce within the Speedo business that’s going to impact 08 earnings?

Helen McCluskey

It was a $5 million impact in the fourth quarter from Speedo. We always plan for inventory obsolesce in all the businesses. There’s nothing extraordinary in the plan for this year for 08.

Unidentified Analyst

Okay. Then a follow up on retail, you look like you’re going to add about 80,000 square feet to your retail, that’s what you’re doing this year, is there a reason you couldn’t accelerate that? And then second, I think you’ve opened some great locations recently like Regents Street, etcetera. If you get to 2011, 2012 what is the profile of your store openings and the productivity of year one look like in your plans.

Joseph R. Gromek

Okay let’s take the first part of that question first, we’re opening up 80 to 85, I think last year we opened up 85,000 square feet. Our plan last year was to open up 50,000 so we were going from 250 to 300,000 square feet. We told you at the beginning of the year that we’re going to grow by about 20% so we beat that number. The brakes are off on this and the accelerator is being pushed pretty hard. I got comments down the end of the room there, Charlie Perron our chairman saying, “Nothings hold you back here push Calvin Klein has hard as you can, push international as hard as you can.” And we have the funding to do that. So, it’s a matter of the appropriate real estate. We’re pioneers in many of these situations and we have to be in premier locations and that’s the number one priority, premier locations so, that does constrain us to a degree. We’ll continue to work on it but candidly, if it’s available to us in great locations we will open up as much as we can, as much as we can handle, as much as we have the infrastructure and the people to handle or as we continue to acquire more people along the way. So, if 100,000 square feet become available to us this year we will do that. And, Larry will ensure that we’re following the appropriate financial controls, that we’re measuring the performance of these units door-by-door, that they can hit our hurdle rates and can achieve our objectives.

In terms of the go forward what will the profile look like in the future; we’ve opened up many, many, many small stores. So anywhere from 200 square feet to the Regents Street store which I think is about 5,500 square feet all in which is now our largest. We believe that there’s opportunity to change the mix, to do things in a different way and we’re testing different formats as we speak. Underwear stores by themselves do very well, jean stores do very well. When we put underwear in jean stores the men’s part does well the women’s part doesn’t do well so there’s a gender issue. We’re looking at changing the design of the store so that maybe if we could get a lot of frontage we could have two doors, Calvin Underwear over here, Calvin Jeans over here, cut down on the overhead, one manager, one computer system, etcetera and maximize the opportunity. But, that’s a real estate initiative as well, we have to be able to get that level of frontage. So, if we can get 50 or 60 feet of frontage then we’ve got a good opportunity. If we’ve got 25 feet of frontage in a bowling alley we can’t do that. So we’re investigating and we’re tweaking and tooling all of the different aspects.

A key that Frank mentioned to you earlier was the integration that took place yesterday in Europe where we placed the entire commercial organization behind one individual Thomas [Oxmarker] who was the managing director over at Calvin Klein underwear for the last half a dozen years. He’s now assuming responsibility commercially over jeans as well. So in Europe where we’ve been jeans, underwear, jeans, underwear for the first time we will be fully integrated and that should have a big impact on our opportunities moving forward and our ability as we negotiate with landlords for space we’re doing it once we’re not doing it twice, in fact three times with some accessory doors. So, that looks very positive to us. Frank, you may want to comment on some of the results in Asia, in Hong Kong specifically in some of the new formats.

Frank Tworecke

We have a number of different profiles as Joe said that we are working on. Regents Street being one end of the spectrum, we have another store to that end that we’re in the process that we’ve signed a lease to in Dusseldorf, and we actually are going to look to bring some other categories of product in to that environment. Then, we’ve also opened up an accessories store in Hong Kong because as you know we’ve retained the rights to open accessory stores at retail and we’re working right now on developing a model for accessory only stores in Asia and in Europe so we’re working hard on that. We also have the license for Bridge Sportswear in Europe. This year we will be opening up stand along bridge stores, men’s, women’s and accessories in square footages between 800 and 1,000 square feet. To Joe’s point we’re finding the right model, we want to understand the model and the geography that it works in and then we can end up rolling them out. Now, we don’t want to start rolling out concepts and stores that don’t have or give us the returns that we expect so we are in some respects just testing what’s the correct model for that category of business, how many categories of business can we put into a foot print and once we understand that we can make more intelligent decisions and certainly be a lot more aggressive in the roll out strategy.

Analyst Susan

Two quick questions, Helen or anyone on the team can you address all the hoo hah about your swimsuit and others I assume potentially violating – is this just a tempest in the teapot or is there a real risk here that your suit and other suits will be thrown out of the Olympics and ergo you spent $8 million in incremental marketing for nothing? That’s the first question. Second question is, Helen, can you share any insights into the bra launch – because talk about anniversarying. We’re anniversarying a huge, hugely successful men’s underwear launch last year. Any insight there would be very, very helpful.

Helen McCluskey

On the Speedo, the LZR Racer hoo hah as you say, as far as we know as it stands right now the suit is FINA approved. It was developed with FINA’s involvement from the start. We don’t believe there’s any risk of not being able to participate in the Olympics. Certainly breaking that many world records in a matter of four weeks has raised a lot of eyebrows and a lot of questions but we knew in testing that the suit was the fastest suit out there. Based on everything that we know there is no risk. FINA did approve it. They were involved in the development process so right now we’re very appreciative of all the PR surrounding it and the great results. We’re looking forward to it.

Joseph R. Gromek

Susan, I think you also have to consider that if for some reason that suit disintegrates they’re going to go back to last year’s Speedo suit. So no risk in that regard at all. Speedo will be very well represented at the Olympics.

Helen McCluskey

But last year’s is still faster than anybody else’s. So we just beat ourselves with the Laser Racer. I think we’re – to Joe’s point regardless, I think we’re in good shape for our performance in the Olympics. On the launch of Seductive Comfort we’re still in the process of booking it but we did present it at the last market and where we stand today we have booked worldwide about 500,000 units so we’re very excited. Certainly it’s a big launch for the US but on a worldwide basis it is a big launch as well. We would anticipate in terms of revenue that we anniversary seal with this launch. And then layer on the men’s initiatives, all of that should vent out to a net gain for the year. But certainly Steel is a big thing to come up against. We’ll be coming up against ourselves in August but we’re very encouraged by the response so far to Seductive Comfort.

Unidentified Analyst

One question for Joe, you’ve obviously got a great reputation for taking underperforming brands and making them perform so if I look at your five year implied operating margin goal, wouldn’t I expect that to be dilutive if you got an acquisition in the next 12 to 36 months that meets your criteria? And then the second question for Larry, I think your DTC margins are 15% and your four wall margins are 20%, so I’m wondering what’s diluting that? It can’t be e-commerce. Or maybe it can.

Joseph R. Gromek

I’ll take the first part of the question. Again this all involves around the strength of Warnaco today which is all about our global platform and any brand that we would be able to integrate into our company today we would believe that we would be able to take full revenue opportunity to maximize whatever brand it is on a global basis. So we have people in place chomping at the bit but what is the next opportunity for us? In some cases it’s building, brick and mortar and in other cases it’s relationships where we function in a concession environment. So for example if we came up with the appropriate brand for Spain, we would have access to 100 to 150 locations overnight and I think that would allow us then to do things in an unusual way. Our Korean model is the same where we’re doing in excess of $150 million today. Two thirds of that business is done in department stores that are concession based. We have unique opportunities based on the relationship factors, having people on the ground in Spain, in Korea, you could take that to other geographies. That puts us in a unique position and candidly we’re not looking for broken businesses. When we bought the Calvin Klein Jeans business in Europe and Asia it was a good business. We made it better. It was growing and it made great progress but we made it better and I think that’s what we would be looking at trying to accomplish. We would try to find something that is successful in some geographies that could be exploited in others understanding that our business is growing in a unique way right now.

Lawrence R. Rutkowski

Steven, in terms of your question about the retail business as we said several times during this presentation that currently there’s some of our four-wall profits generated in store contributes over 20% operating margin. The difference between that and the 15.2% is as we typically do there are allocations primarily administrative and centralized services that are not part of the store costs. It’s just an overhead allocation. This is why as we continue to accelerate our growth in the retail initiatives those overhead allocations should be leveraged and become more efficient enabling our operating margin to grow faster than our top line growth.

Analyst Steve

[Inaudible – no microphone]

Lawrence R. Rutkowski

Exactly right.

Unidentified Analyst

How much overlap do you have with Levi Strauss internationally in your retail business?

Joseph R. Gromek

Are you saying where do we trade competitively against Levi?

Unidentified Analyst


Joseph R. Gromek

We trade in 110 countries right now. I’d venture a guess that they’re probably in 130 or 140. There’s a significant overlap. I’ll put the US aside because you’re very familiar with it. If we looked at the Korean market for example, in the spaces that we go trade there are four major brands, Calvin Klein, Levi, Diesel and Polo and at this point in time, Levi trades typically number one, number two Calvin. Diesel is the highest priced and it’s probably number three, four and then Polo and Diesel flip. So we are rivaling in the best markets Levi at this point in time. Levi candidly outside of the US is premium priced. We’re talking the jeans that retail anywhere between $100 and $250.

Helen McCluskey

Have we got any other questions?

Joseph R. Gromek

Thank you very much and I guess we’re going to be talking to you first, second week of May with our Q1 results. Have a great day.

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