PVH Corp.
Q1 2008 Earnings Call Transcript

Published: 21 May 2008

[Operator:]

Good day everyone and welcome to today’s Phillips-Van Heusen Corporation’s first quarter 2008 earnings release conference call. This webcast and conference call is being recorded on behalf of PVH and consists of copyrighted material. It may not be recorded, reproduced, retransmitted, rebroadcast, downloaded or otherwise used without PVH’s express written permission. Your participation in the question-and-answer session constitutes your consent to have any comments or statements you make appear on any transcripts or broadcast of this call. The information made available on this webcast and conference call contain certain forward-looking statements which reflect PVH’s view of future events and financial performance as of May 21, 2008. Any such forward-looking statements are subject to risks and uncertainties indicated from time to time in the company’s SEC filings. Therefore the company’s future results of operations could differ materially from historical results or current expectations, as more fully discussed in our SEC filings. The company does not undertake any obligation to update publicly any forward-looking statement, including without limitation, any estimate regarding revenues or earnings. At this time I would like to turn the call over to the Chief Executive Officer of Phillips-Van Heusen, Mr. Manny Chirico. Please go ahead sir.

[Emanuel Chirico:]

Thank you very much, 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. Let me starting off with saying we were quite pleased with the results of the first quarter particularly considering the overall difficult retail environment. Let me focus first on the Calvin Klein licensing segment. We posted a 19% increase in royalty revenues in the first quarter and a 17% increase in operating earnings in the quarter. It should be noted that the quarter includes about $3 million of expense timing issues which will reverse out over the balance of the year. These expenses principally relate to an increase in advertising associated with a number of new second half launches and marketing associated with our new specialty stores for Calvin Klein. We continue to expect the operating margins for the Calvin Klein licensing segment to increase about 200-250 basis points for the year. The licensing revenues in the first quarter, internationally we were up about 28% while our domestic business was up about 8% for the quarter. Getting into each component of the business I’m going to start with underwear. Underwear posted bout a 25% increase in royalty revenues for the quarter. Business grew in the United States about 10% and internationally about 35% in the quarter. The international growth was fueled by a number of new product initiatives coupled with the continued expansion of retail stores, particularly throughout Asia. We saw continued strength both domestically and internationally in our men’s business, principally driven by our Steel product which is benefitting from a very strong product offering and an amazing marketing campaign which features Djimon Hounsou As we look out into the underwear segment for the second half of the year, the major news for fall is that we are launched Seductive Comfort our new women’s bra initiative. Seductive Comfort brings much excitement to the bra business that Steel did for the men’s business in 2007. The launch will be significant and supported by a marketing campaign featuring Eva Mendez. Eva personifies the Seductive Comfort proposition perfectly and speaks to the Calvin Klein consumer that is diverse and she has very broad appeal. The jeans business posted a 30% increase in royalties for the quarter. Our international business was up about 40% while our US business was up about 10%. The US business was driven by the women’s side of the product assortment as well as the newly launched plus sized department store business in the United States. The international growth was driven by a very strong performance in Europe and Asia, strong wholesale growth as well as the continued expansion of retail stores, particularly in China and Korea. And that business for us in Asia and Europe continues to be very strong. Moving on to fragrance, our fragrance business was ahead of plan for the quarter. We planned the business down and it was down about 5% from last year when you’ll remember we launched CK IN2U in the first quarter of last year. There was a significant [fix shift build] going on in the first quarter and we’re up against that launch. And just to remind everyone, the CK IN2U is today is about a $130 million wholesale business worldwide. We’re coming off in the fragrance business three years of plush 20% revenue growth driven by a number of new initiatives, including CK IN2U, Calvin Klein Man and a number of introduction under the Euphoria label. The business was very strong internationally and was softer in the United States when you consider that the major distribution in the United States continues to be the department store base and their fragrance business was soft overall. We have a major fragrance launch planned for the fall. The launch, which will be announced probably in the next couple of weeks and the name of the fragrance will also be launched at that time will also feature a significant marketing campaign with Eva Mendez as our celebrity spokesperson. There will be a significant marketing campaign launched with Eva and there will be over $20 million in the third quarter spend on launching the product as well from a marketing point of view. So we’re very excited about that, we really think that’ll have a big lift for us in the second half of the year. Just touching on some of our other licensees, G3 had a very strong quarter, particularly on their outerwear business and their women’s dress business continues to do very well in all department stores, particularly Macys. Our men’s tailored clothing business with [Peer] has just had an extraordinary quarter. Business is up over 50% for the quarter. We had strong growth coming both from Macys and in particular Dillard’s. So that business overall, Calvin Klein both domestically and internationally had a very strong quarter for us. Continuing with Calvin Klein, our men’s Better Sportswear business continues to perform very well. Shipments for the quarter were up over 15%. At department stores Calvin continues to be one of the best performing men’s brand on the collection sportswear [peg] when you measure it on a productivity basis, on sales per square foot and maintained overall gross margins. It was very strong there, our order book for fall continues to be very strong, we continue to gain square footage both from a door expansion but even more importantly from an expansion of our presentation at department stores. Our Calvin Klein outlet retail business had another very strong quarter. Comps were up 10% in the division. Margins were ahead of last year. The Calvin Klein outlet business is one of our most profitable businesses within our retail portfolio and our overall portfolio. These stores average over $550 in sales per square foot and have an in-store four-wall profitability contribution in excess of 30%. We currently operate about 85 Calvin Klein outlet stores and believe there is an opportunity to grow this business to 135 to 140 stores over the foreseeable future. Moving to our dress furnishings business, dress shirts and neckwear continue to have a strong performance. The environment which is putting pressure at department store business, we don’t see it in the dress furnishings category. Department stores, it’s one of their best performing category. The business, our business continues to run ahead of sales plans. At retail our average unit retails are up considerably over last year which has improved the overall operating margins and has and will increase the profitability of the business going forward. At neckwear we recently announced the Mulberry neckwear acquisition. That acquisition will add about $25 million in annual sales to the superb division of our PVH neckwear. The acquisition labels that we acquired were Kenneth Cole, Kenneth Cole Reaction, Sean John, Jerry Garcia and the BCBG label. The integration has just begun and is off to a good start. We believe this acquisition will deliver synergies and significant future earnings accretion as the business is layered in and we get the startup costs behind us. The two business which have been most impacted by the difficult retail environment has been our moderate legacy wholesale sportswear business and our moderate legacy outlet store business. Our moderate brands, Van Heusen, Arrow and Bass and to a limited extent IZOD have been impacted by the environment in the first quarter. We’ve experienced price compression and additional promotional allowances and markdowns necessary to drive sales and to keep inventories clean. First quarter comps in our moderate outlet store division ran about minus 6% in the first quarter which put some pressure on gross margin and operating expense leverage. However, we did see a turn in business beginning in April. Our comps beginning in April improved significantly and the trend has continued into May and for our outlet legacy businesses, the trend right now is more towards the flattish comp than the negative trends that we have seen, so I feel much better about that business today than I did two months ago when we reported our fourth quarter business. Given the sales and margin pressures that we experienced in the first quarter, overall operating margins were down about 200 basis points and that was to fund the businesses that felt the pressure. From a marketing point of view, we continue to invest heavily in our brands

[Michael Shaffer:]

Thanks Manny. Total revenues grew 6% in the first quarter to approximately $625 million and our earnings per share was $0.90 which was $0.02 better than the top end of our previous guidance. Fueling revenue growth was our Calvin Klein licensing business which posted a licensing revenue increase of 19% and an earnings increase of 17%. Our operating margins in the Calvin Klein licensing business was down from the prior year as a result of additional advertising revenues which were collected and spent within the quarter. This is a timing difference, Calvin Klein licensing operating margins for the year will increase approximately 200-250 basis points over the prior year. Our other Calvin Klein businesses also performed well with revenues exceeding the prior year in Calvin Klein sportswear, Calvin Klein dress shirts. The Calvin Klein outlets posted a comp increase for the quarter of 10% versus the 5% we planned. The difficult retail environment continued to pressure our legacy businesses. Our legacy outlet comp sales for the quarter were minus 6% compared to our guidance at minus 5%. Our legacy outlet business comp store trend improved in the later part of the first quarter through today. Our legacy comp store trend for this period is flat to minus 1%. The shortfall in outlet revenues for the first quarter was offset by dressed furnishings and sportswear revenues. The combined wholesale and retail businesses posted operating margin declines for the quarter of 220 basis points as a result of startup costs for new businesses, an increase in advertising expenses and gross margin pressures. Startup costs were approximately $7 million for the first quarter. Startup costs are estimated to approximately $12 million for the full year and are planned in the first half of the year as opposed to last year when the costs occurred in the second half. On the balance sheet, inventories ended the quarter very clean. Our inventories were 5% greater than the prior year driven by new businesses. Excluding these new businesses, inventories were down 3% to the prior year. We are also on plan for 2008 to generate approximately $80-$90 million in cash with capital expenditures at about $90 million. For the year we’re holding our revenue guidance at $2.6 billion. We have increased our earnings per share guidance up to $3.32 to $3.41 which continues to reflect the cautious view of the environment for the balance of the year. We are projecting second quarter earnings per share of $0.63 to $0.66. Included in our second quarter earnings per share guidance are startup costs of approximately $5 million associated with our Timberland sportswear business and Calvin Klein specialty stores. Revenues for the second quarter are projected to be $575 to $585 million. And with that, I’ll turn it back to Manny.

[Emanuel Chirico:]

I’d just like to take this opportunity to really just put our overall projections in place. As I said in the first quarter we tried to put plans together that we really felt that we would be able to [recede] if we delivered against our numbers. So we put our earnings per share guidance we feel we clearly are very comfortable with as we go forward. If you look at each piece of the business, our Calvin Klein licensing business for the balance of the year is being projected to grow at about 10%. The current trend in the business is 15% plus growth that we were experiencing. So we clearly feel that in the Calvin Klein licensing business, given the current trend in business, the currency gains that we’ve had that clearly that there’s upside against this business as we go forward. Our other Calvin Klein businesses, both sportswear and outlet continue to exceed sales plans and trends are well ahead of where our plans are. We’re planning comps for the balance of the year on the Calvin Klein retail stores at plus 5%. The trend through yesterday is closer to plus 11%. So clearly we feel good about the Calvin Klein outlet business and our Calvin Klein sportswear business. Our dress furnishings business just continues to perform, both neckwear and dress shirts. We see no sales slowdown there, this business continues to deliver and the acquisition of the Mulberry assets give us the ability if we do what we’ve done in the past which is to integrate quickly the business online is to exceed the estimates that we have for that added piece of the business sin this current fiscal year. So we think there’s upside in dress furnishings as well. The businesses that have been under the most pressure have really been our legacy sportswear and retail businesses. We really feel our projections today really take into affect the downside pressure that we’re feeling in sales in our wholesale sportswear businesses, Van Heusen, Arrow and to a limited extent IZOD. We factored in the open to buy contraction that’s going on at department stores, we think we have that factored in and we talked about it in the first quarter that we’ve taken down our legacy sportswear businesses anywhere from $35-$40 million. We continue to have those estimates given the projections we have from our department store accounts and how we feel about it. Those businesses look very realistic. We see inventories at department stores getting back in line as we go into the second quarter and we feel very strongly that inventories are going to be in excellent position as we get to the back to school selling period. We haven’t factored in any significant improvement in gross margin starting in the second half of the year and we’ll be up against much softer business in the second half of the year and inflated inventories at retail in particular and the overall environment. So we believe if the department stores, our customers are close to their sales plan that there could be margin upside for us in the second half of the year given the pressure that we experienced last year in the second half. Finally in our outlet store business, our legacy businesses, we feel really good about the trend of business over the last six weeks, getting to a flat to minus 1% trend with a projection of minus 2% gives us comfort there. We believe we have our margins appropriately planned there and we know that our inventory of underwear was at this time last year and it is in very clean position. So I think we’ve done everything we need to do to position ourselves to deliver and hopefully exceed the estimates that we put out there. We’re being cautious on our projections for the balance of the year given the environment. We’ve beat the estimates for the quarter by at least $0.03 on the top end and on the low end bye $0.05. We did not flow all of that through, we only flow through a small portion of that. It’s just our nature how we run the business. As we see hopefully a continuation of this trend into the second quarter, we’ll be more aggressive in moving the bottom line, but I’m going to need to see some more of that before I get ahead of ourselves and I think we’re in a situation right now where the consumer can be very fickle, up and down. And with that I tried to put that in perspective, I’d like to open it for questions and turn it back to the operator to start the Q&A portion of the call. Question-and-Answer Session

[Operator:]

(Operator instructions) Your first question comes from Robert Drbul - Lehman Brothers.

[Robert Drbul:]

On the Calvin business, in terms of the sportswear and the department store business that you’re seeing, can you give us a number on the booking side of it as you look into the rest of the year in terms of wholesale sportswear side. And Mike I was wondering if maybe you could talk a little bit about exactly how currency did help you or how much currency helped you, whether it’s in the Calvin royalty business or overall in the business today.

[Emanuel Chirico:]

The Calvin Klein, as I said, the Calvin Klein sportswear business in the first quarter grew about 15%. For the balance of the year we’re planning that to grow about 10%, 10-11%, our orders are in place to support that in the sales plans. And we continue to look for opportunities there with some of our key accounts. There might be some more opportunity in the fourth quarter, we’ll see how that is with some of the potential door expansions, shop expansion in doors.

[Michael Shaffer:]

In terms of the currency, pretty much driven by the Euro for the first quarter on both the revenues, also by some expense, we were up about $1-$1.5 million as a result of that.

[Operator:]

Your next question comes from Carla Cassella - J.P. Morgan.

[Carla Cassella:]

On the sourcing costs, where are you seeing sourcing costs going, do you think we’ve seen the peak and it’s going to get better or does it only get worse from here and how do you absorb that?

[Emanuel Chirico:]

Heretofore we haven’t seen any impact in sourcing costs on current product that we’re dealing with. Our sourcing costs through the first half of the year are flat year over year. We’ve talked about that we were seeing some increase of 1-3% in the back half of the year. We have absorbed that, we’ve dealt with some of that by just moving some sourcing around. The pressure we really see is 2009 and I think everyone is seeing it and if everyone’s not talking about it I don’t think that they’re being forthright about it. I think there is pressure, the dollar is the main culprit of it. There are social issues and other issues around the world, but it’s clearly pressure, its spring 2009 on product. I’m very comfortable with it in 2008. It’s going to require some price increases at retail across the board and I think some of our more upper end brands will be able to deal with that much easier than some of our more moderate brands. But that’s one way we’re attacking it. We are raising our prices and we’re going to have to manage that to make sure that the velocity sticks. But right now if I had to guess I would look at 2009 and think we’re going to be somewhere between 4-6% apparel inflation. We have not experienced apparel inflation for the last seven years.

[Carla Cassella:]

On the acquisition front, are you starting to see anymore increase in opportunities given this environment or pretty much what you’ve been seeing.

[Emanuel Chirico:]

There’s more talk now, I guess is the best thing I can say, there’s more discussion. Being a strategic buyer with a strong balance sheet and $300 million in cash makes us a strong choice to be an acquirer for anyone who’s looking to sell. And I think to be honest our track record with private companies like Superba that we brought in very well with management teams and how we’ve dealt with Calvin Klein, the brand and the person, to successfully bring that in has made us a choice for people to speak to us about opportunities, even if they’re just exploring. So I think as the year goes on very similar to what I said in the first quarter, I think it’s still going to be relatively slow for the first through the six months of the year and I think the second half with the acquisition appetite might open up and the ability to do deals might open up.

[Operator:]

Your next question comes from Brad Stephens – Morgan, Keegan.

[Brad Stephens:]

The cap ex plan it looks like it came down $10 million, where is that coming from and then I know the last two years you’ve invested a little more on the cap ex front, where should we assume that goes in FY09 and beyond?

[Michael Shaffer:]

A lot of different pieces on the cap ex reduction, a little bit on our legacy business, pullback in some store openings just based on the environment. Some support that we planned to spend on we pulled back on, overall that came down about $10 million from plan. Offsetting that in our cash flow was the fact that we bought Mulberry and that was not planned for. So net-net it came to about [inaudible] dollars, we’re still at about $90 million in cash flow.

[Emanuel Chirico:]

And for next year on the cap ex, we talked about $65-$70 being a more normalized number as we get through the investment back in the business.

[Brad Stephens:]

Startup costs in the first quarter were $7 million, I think you said originally $5 million. Second, could you talk about the impact of American living, it was pretty aggressive on the pricing front, how this impacted IZOD and then last it looks like you’re breaking out the Calvin Klein collection business in corporate overhead, so can you talk about how to look at corporate overhead in the collection business this year?

[Emanuel Chirico:]

I’ll start with the last piece first. The corporate piece, the Calvin Klein collection business is planned to be about a break even to a small loss. So I don’t think at the end of the day it will have much of an impact on corporate. We’re planning somewhere around $30 million in volume this year as we bring that business in house. So I think from that point of view, that’s the collection portion of it. We really shouldn’t have a bottom line impact, any impact on the company. Secondarily, the other question, American living, I think J.C. Penney’s efforts there I think were well placed trying to move price points and consumer perception of the brand. Execution I think was very good when we look at how it was presented, but they just walked into a landmine from a timing point of view of trying to launch a new brand at higher price points than their customer historically has been at. The difficulty I guess, the challenge placed on everyone is right now, those goods are just much more promotional than anyone planned and its putting some pressure on all businesses in the store because they’re anywhere from $5-$15 less retail than would have been planned for at this point in time as they’re trying to right size their inventory. I think that situation will correct itself by the middle of June, particularly for back to school, inventories will get right sized. But in that store, that’s a challenge to deal with. That being said, our IZOD business and our Van Heusen business are close to being on plan and given just the general environment I think that’s good performance for the brand. The Van Heusen performance in particular has been very strong across the store and we’re seeing good results in IZOD in dress shirts and a number of the other areas besides just the normal men’s sportswear. So I think overall it’s an impact, it’s something that we watch closely but I think it’s been minimal from a corporate wide basis but significant at J.C. Penney.

[Brad Stephens:]

And the extra $2 million in startup costs?

[Emanuel Chirico:]

It was an estimate, I don’t know what else to say, the Calvin Klein specialty stores startup costs have been more significant, some of the stores have opened later than we thought so that’s created some additional startup costs. We didn’t have the sales associated with them. I mentioned on the call last time we’re running about 40% of our sales plan. We’ll open another five stores this year and stop, get a sense of that business. The stores I think are great marketing vehicles for the brand, it’s very important that we have a retail presence in the United States. But I’m very comfortable that it will not exceed $12 million and that’ll be over from a startup point of view, startup costs will be over by the end of the second quarter.

[Operator:]

Your next question comes from Jennifer Black - Jennifer Black & Associates.

[Jennifer Black:]

Manny, looking down the road, I’m curious to know how you would see your business three to five years or one to three years or both as a percent of international to domestic.

[Emanuel Chirico:]

Clearly one of the strategic objectives for the company is to grow our international exposure for all of our brands. If you look at our profitability, about 30% of our profits in the first quarter came from international. Last year for the fiscal year it was about 25%, maybe a little higher, but to give you a perspective. We do that principally using a licensing model for all of our brands. We operate in Canada, we operate in Mexico and we have a small business in Europe doing dress shirts. But it principally the revenue that we drive and profits we drive is through the licensing model. As I look out over time, I would like to see that change. I think it’s important that we become more of an international company, I think we have to do that very carefully and be smart about how we do that. It’s clearly going to be done through acquisitions of brands that have a platform to grow internationally and then over time potentially bringing some of our businesses from around the world in house. And I think as we try to do everything we’ll try to move judiciously as we try to make those investments. But clearly I think we need to grow our international component of our business and not rely solely on licensing as the model for international growth. And I would hope in three to five years that from a sales point of view that 30% of our sales will come from overseas and closer to 45-50% of our profit would come from overseas. That would be our objective and goal long term.

[Jennifer Black:]

And then secondly, looking at your real estate portfolio, are there any legacy outlet stores you would want to convert to Calvin Klein outlets?

[Emanuel Chirico:]

Yes, that’s something that we’re looking at, we’ll talk about that probably more in the not too distant future but there’s opportunities that we have to take some of our formats and some of those stores and potentially the sales per square foot is double and the profitability is double in Calvin Klein stores. So there’s an opportunity to do that in selective ways going forward.

[Jennifer Black:]

And then lastly, how do you feel about your ability to chase sales in all your division based on the lean inventories that these retailers are keeping?

[Allen Sirkin:]

There’s a lot of stress and strain on inventory levels at retail. We’ve taken a position that we’re going to manage the inventory for the balance of the year very tight. The one exception that you would find is with our strong replenishment position in dress shirts we’re able to service those business. Same thing in neckwear which are short cycle businesses, we’re able to replenish and chase trends. So an example of that would be year to date, we’re running up about 10% on dress shirts, a fair portion of that comes from core replenishment and therefore we are able on that side of the ledger to capitalize on flexes in the sales trends from now till the end of the year. On the sportswear side we’ve taken a much more judicious approach. Our idea is to stay clear, is to minimize the amount of price depression through clearance and mark downs and try and hold onto our AURs for the balance of the year and we think that’s a much more prudent approach to the sportswear side of the business.

[Operator:]

Your next question comes from Sean Naughton – Piper Jaffray.

[Sean Naughton:]

On traffic and inventory within the heritage businesses, are there any changes by Van Heusen at IZOD or any regional differences with these stores?

[Emanuel Chirico:]

Our inventory in our retail business on a like by like business account 3-5% across the board, so we feel very good about the inventory position. I felt good about the inventory position last year so we really think we’ve managed it. We’ve taken advantage of the uptick in volume that we saw in April and continued to really keep ourselves clean. So I think our President, our Operating Division Managers have done a really excellent job in keeping us out of trouble with inventory and moving it. Geographically, look I think we are seeing pressure, not much different than I’m sure you’ve heard, Southern California tends to be a little softer than the rest of the country. Florida also has been softer, however when you get into a vacation o r school break or vacation period, the Florida business bounces back very strongly. Tourists are still travelling, vacation seems to be taking place given the strength of the Euro, the weakness of the dollar, I don’t think there’s much overseas travel going on, people are vacationing this summer, I think the majority will be in the United States and that usually works very well for our outlet business which is very much tied into the tourist destination locations. So overall I think our businesses continue to perform and the softness of our legacy retail businesses, Geoffrey Beene designer business and we’re taking steps to manage that inventory and keep ourselves clean.

[Sean Naughton:]

Any breakdown between the retail and wholesale, the 220 basis points decline in the first quarter?

[Emanuel Chirico:]

You’ll see our segments, we’ll break it out significantly when we issue the Q in about a week or so. But I think what you’ll see, the biggest pressure would be in our retail businesses. They had the most significant pull down in margin and because of the minus six, really on expense leverage on store expenses. So I think you’ll see more there than you will on the wholesale side of the business. The wholesale side of the business is probably down 100 basis points where the retail division is down closer to 280.

[Sean Naughton:]

Lastly any change on the magnitude or the overall size for Timberland and IZOD women’s, I think you had mentioned 100-150 on Timberland and then 200 on IZOD women’s, are those still reasonable goals?

[Emanuel Chirico:]

They’re still reasonable goals as we talked about three to five years out. We’re planning the IZOD women’s business will be $50 plus million this year, $50-$55, the Timberland business is a $50 million business but we’re only going to have half a year or so worth of sales so we’ll be $25 million plus there. So no change, feel good about both businesses, the IZOD women’s business is in and is performing in, every retailer talk, the toughest part of their business is women’s and the toughest part of the women’s business is the main floor collections, sportswear classification business. And I think IZOD has really outperformed the completion in a tough environment. Timberland, lot of excitement about the brand, lot of excitement about the marketing that’s going on that’s being directed at the Timberland headquarters. But where we are totaling in sync with and will take advantage of, particularly in the back to school selling period, a lot of the initiatives there going on. So I think there’s some real excitement going on there, we feel good, the retailers have really accepted it will. We’ll be in 300 Macys doors and I think that’s a good summary. So we’re optimistic about Timberland’s launch for us.

[Operator:]

Your next question comes from Kate McShane – Citigroup.

[Analyst for Kate McShane:]

This is [Karina Shupp] for Kate McShane. Can you give us a little more color on the increase in receivables this quarter?

[Michael Shaffer:]

Two components, there was clearly new businesses we layered on the Calvin Klein specialty business. The IZOD women’s business is new for this year. To a much smaller extent the Mulberry business. And the wholesale Calvin Klein collection business. Overall that was one-third of the increase. In addition to obviously the businesses, we did have shipments that had gone out later in the quarters. So instead of the end of March those went out maybe the first week of April. So it did push our receivable balance up to some degree. There has been some, orders are going but getting confirmations and dealing with retailers, there’s a little bit of a push back.

[Emanuel Chirico:]

I guess from a cleanliness point of view, there are no aged receivables in the mix, we don’t believe we have any collection issues to speak of and I don’t think there’s an issue from a realization point at all.

[Michael Shaffer:]

And then we also have a very small business in terms of specialty stores, so business is really with the big guy.

[Analyst for Kate McShane:]

On the Calvin Klein licensing business, did you guys pickup any of [Warnico’s] benefit from the extra fourteenth week in the quarter?

[Emanuel Chirico:]

No, we cut off, our quarters don’t align. [Warnico] is a December yearend, we’re a January yearend. We had thirteen weeks against thirteen weeks, we didn’t have the extra week at all.

[Operator:]

Your next question comes from Jeff Mintz – Wedbush Morgan.

[Jeff Mintz:]

Following up on your answer about there being some push back on orders, do you think that’s more of an inventory management thing or are the retailers trying to get product closer to need?

[Michael Shaffer:]

I think the trend has been getting orders closer to need. Everything is going, orders are being honored, there’s nothing here except sometimes having a cutoff date and retailers taking the goods more towards the end of the cutoff date as opposed to the beginning of the cutoff date.

[Emanuel Chirico:]

I guess to add, coming out of March, just to put the point out, everybody’s got short memories, coming out of March, if you remember how horrific comps were coming out of March for the department store sector in particular, minus 15, minus 10, minus 12, there was a push back particularly in that period of time when business began to improve the first three weeks of April in particular in both department stores and ourselves, there was a pull in of the goods. So clearly we felt that there was a two week period there where the orders that we were expecting to go in the beginning of April or the end of March really didn’t happen until April 15, and when you’re giving 60 days terms and when you’re, it just was a rollback throughout the [hold] days. So that I think is the basic issue.

[Jeff Mintz:]

If you could just, on the dress furnishings business, it sounds like the business is doing really well, are you seeing any kind of changes in buying patterns in terms of what the customer is buying or are they not really changing despite the economy?

[Emanuel Chirico:]

On dress furnishings, it tends to be counter-cyclical to a downturn. Gentlemen tend to buy two or three dress shirts and some neckwear at $30 each as opposed to a $400-$500 suit. So that has always been historically what’s gone on in our dress shirt business and we see that trend continuing, so we’re actually comping positive in dress shirts throughout our business.

[Allen Sirkin:]

From a product perspective, in our moderate brands, particularly Van Heusen and Arrow, we have a very strong position in the core side and replenishment side of the business. We think that that’s the strength of the brand, it’s also the value of the brand. On the higher end though and our fashion brands, Calvin, Kenneth Cole, we’re seeing the interest in the fashion side of the business. So we think that it’s properly segmented to the brand equities and that’s the way we own the inventory and we’re seeing the kinds of sales that we had planned when we sold the assortments in.

[Jeff Mintz:]

On the tax rate you had said previously kind of a 36.5-37% for the full year, is that still an appropriate assumption?

[Michael Shaffer:]

Yes it is. The first and second quarter will be more in the 38% range, 37-38% and then for the balance, the second half of the year will be lower and we still are looking at about 36.5-37% for the full year.

[Operator:]

Your next question comes from Emily Shanks - Lehman Brothers.

[Emily Shanks:]

It looks like interest on the P&L which is a bit higher on a quarter over quarter basis, that dollar amount, are there any onetime items in that?

[Pamela Hootkin:]

For the first quarter we were higher by about $2 million, that was pretty much 50% due to the fact that we had used $200 million of our cash in the fourth quarter to complete our buyback program, so we had lower cash balances. In addition, the average interest income rate that we earned on the remaining cash balance was about 1.5-2% lower and that was responsible for the other $1 million. So it really is a function, we pretty much operate with fixed debt so our growth interest expense component is pretty much flat. The variation in our net interest expense really is driven by earned interest income which moves both on balances and rate.

[Emily Shanks:]

With the credit market stabilizing, particularly the high yield market, would you consider refinancing those 7.25% that become callable in June should the economics warrant it?

[Michael Shaffer:]

If the economics warrant it, absolutely. Again it would be a combination of both the rate, terms and covenant benefit that we potentially would get, considering the fact that when we did those two notes it was in connection with the Calvin Klein acquisition, we were much more levered, a higher levered company with a different balance sheet and a different profile. S o clearly we think there would be benefits to refinance them that are both earnings driven and covenant relieving benefits would come with it.

[Operator:]

Your next question comes from David Glick – Buckingham Research.

[David Glick:]

Manny a little color on the Calvin Klein specialty stores, some of the lessons you’ve learned, some of the successes, some of the things you’d like to improve upon, just wanted some color on what you’ve learned so far.

[Emanuel Chirico:]

I’ll start with store size. Our belief going in was for a test and as a marketing vehicle is that we felt that we wanted to have a position that we could really showcase the brand in a way that would present product in the best possible way. And the stores tend to average between 9,000-10,000 square feet. As an economic model, that’s probably too big, maybe 25% too large I would think, except in some of the best and most productive malls. So I think overall the right size stores probably closer to 7,000. But I think what they are and to really do appropriate tests, to be able to test the product categories, to see what really would work in order to have those [inaudible] presented in the store and as you learn what works and what doesn’t and tailoring the mix down, I think you could also then tailor the size of the stores down. To starting with a 7,500 square foot store with the hope of getting to one, I don’t think would have worked, I think you really need to have the merchandise in there to see what would be more productive in a specialty store environment. Secondly, the other lesson we learned I guess if I had a crystal ball, don’t open stores in the middle of a downturn in a recession in the specialty environment. That’s just a reality, traffic is clearly down in mall based retailers. I mean everyone you talk to is dealing with it in different ways. We’re being impacted by it and we’re learning from it and dealing with it. So I think as this starts to turn around I would expect to see some improvement. We’re learning about store location within the mall where it works best, what our better co-tenancies are to be next to. So I think those are all positive learnings going forward. We continue to feel very positive about the stores as a concept but until we can, I assure everyone, until we can demonstrate that we can make the economics work in those stores, we will not go beyond 10 stores. So they are right now a marketing showcase, there’ll be a loss associated with them that’s in the numbers, very manageable and we’ll deal with it and we will not roll any out, I don’t foresee us opening any in 2009 and before we commit to open any we would have to see a change in the direction of the sales trend.

[Operator:]

Your next question comes from Susan Sansbury – Miller Tabak.

[Susan Sansbury:]

Could you touch on backlog and how the retailers are feeling? I think you mentioned that you control license or manage the side of the six largest brands out there, Calvin Klein continues to do very well, there’s no argument about that. But if you put your pulse on some of these major retailers at this point, can you give us any insights in terms of how they feel about the business, whether they continue to plan it down and is it silly to look forward into spring 09?

[Allen Sirkin:]

I guess it’s hard to speak for the retailers, it’s a very liquid environment. Obviously the retailers are very trend sensitive. When their trends are off they will project forward. Virtually every major retailer has tailored their assortments for the back half of the year to a much more conservative level. In some of our businesses it requires adjusting the open to buy, particularly on the sportswear side. On the dress furnishings side, it’s a lot easier for us to manage the ebb and flow because of our in stock position and our stock replenishments. But if someone said to me, how are retailers projecting themselves, I think they’re being very careful and very judicious with their inventory projections for the back half of the year. And everyone is hopeful that they’ll be able to optimize the inventory they have, get the highest AUR they can but in the real world we know that there’s a certain amount of promotion required to bring the customers to the store which is critical to the sale.

[Emanuel Chirico:]

The only thing I would add, I think Allen said it perfectly from our point of view, quantifying it a little bit is I would just say is I think for the most part, every retailer I talk to is planning their sales for the second half something flat to up one, down one. I think you could probably put everybody in that kind of a realm. I think what’s important to remember is they were probably planning their overall sales of last year at the same time for the second half with new stores and LYO stores and comp, they were probably planning a 4-5% increase and what they actually got for that same period of time was probably a 4-5% decrease. So I think what has clearly happened is the open to buy dollars have shrunk for that chain somewhere between 5-10% depending on the brand, depending on your trend and what’s going on. We feel we’ve factored all that in, we have the projections from them, we’ve aligned our inventory and our sales estimates with that and I think it’s one thing that I point to given those projections that makes me feel more comfortable as we go into the second half of the year that I really do believe inventories are going to be in a significantly better position which should translate into both higher margins for retailers and in less margin support for us. So that’s to be demonstrated and how much promotions will be necessary as Allen said to drive the consumer into the store is always a question. But I think we’ve clearly provided for that and we’ve tried to factor into that into our sales estimates and that’s why they’re not as aggressive as they’ve been historically.

[Susan Sansbury:]

So your backlog, your fashion backlog, your non-replenishable backlog is consistent with what you’ve just described is how the retailers have planned their business?

[Emanuel Chirico:]

That’s correct and I would say it’s being planned out somewhere between 5-7%.

[Susan Sansbury:]

You mentioned at the end of your comments that you were cautious about the projections in the first quarter and did not flow through everything. Can you amplify what that means or what you were trying to impart? Did you increase allowances?

[Emanuel Chirico:]

It’s as simple as we beat the first quarter at the top end by $0.03 and bottom end by $0.05, if I’m off $0.01 I’m not sure, whatever, and we only took the guidance up by $0.04. The reason for that is given the environment where we are, the first quarter, that nine months ahead of us, it just didn’t seem prudent to start raising guidance when it seems like everyone else on the street and retailers are actually pulling back. So it just didn’t seem prudent at this time. It’s a contingency against what we said and hopefully we’ll over-deliver against that. We took a little bit out of the second quarter, we took a little bit out of the back end of the year for no specific point of view except to just say let’s husband up some of this upside until I get more visibility.

[Operator:]

Your final question comes from Clark Orsky – KDP Investment Advisors.

[Clark Orsky:]

On the guidance, it looks like part of the improvement is better margins in the legacy business versus what you saw before, is that just from a rebound in sales that you talked about?

[Emanuel Chirico:]

We’re planning them pretty much consistent with where we’ve been. I think the only change has been is that, we always have planned that the first quarter would be more under pressure from an operating margin point of view, so we had planned that to be more of a hit. And the rationale for that really has to do with the inventory position both at overall at retail us just, it was in line, we feel it’s much more in line today, retail, department stores, our customer base and the world at large. So, that’s why we feel like the 200 basis point decline we had would be closer to 130-150 basis points for the balance.

[Clark Orsky:]

Michael can you tell me what the D&A was in the quarter?

[Michael Shaffer:]

The D&A for the quarter was about $13 million.

[Operator:]

There are no further questions.

[Emanuel Chirico:]

Thank everyone for joining us on the call and we look forward to speaking to you on our second quarter call. Have a great day.