Phillips-Van Heusen Corporation Reports 2008 Third Quarter Results

Phillips-Van Heusen Corporation (NYSE: PVH) reported 2008 third quarter and year to date results.

For the third quarter of 2008:

• Earnings per share excluding the operating results and exit costs associated with the Company’s Geoffrey Beene outlet retail division was $1.10, which was in line with the Company’s previous guidance and exceeded the consensus estimate. GAAP earnings per share was $1.03. (Please see reconciliations of GAAP to non-GAAP earnings per share for 2008 later in this release.) The prior year’s third quarter earnings per share was $1.05.
• Total GAAP revenue increased 4% to $727.5 million from $696.4 million in the prior year’s third quarter.

For the nine months of 2008:

• Total GAAP revenue increased 4% to $1,914.1 million from $1,840.7 million in the prior year’s nine month period.
• Earnings per share excluding the operating results and exit costs associated with the Company’s Geoffrey Beene outlet retail division was $2.65. GAAP earnings per share was $2.48. (Please see reconciliations of GAAP to non-GAAP earnings per share for 2008 later in this release.) For the prior year’s nine month period, earnings per share was $2.65.
• The current year’s nine months includes approximately $12 million of start-up costs associated with new businesses, all of which was incurred in the first half of 2008, and which represents an increase of $6 million, or $0.08 per share, over the prior year’s nine month start-up costs of $6 million.

Third Quarter Results

Total GAAP revenue increased 4% for the quarter, driven by a 9% increase in the Calvin Klein licensing business attributable principally to recently licensed product categories and strength in jeans and underwear. The increase in Calvin Klein licensing revenue was tempered by the slowdown in the global economy during the third quarter and the strengthening of the U.S. Dollar against most world currencies. The GAAP revenue of the Company’s wholesale and retail businesses increased 3%, driven by dress furnishings, the Calvin Klein men’s sportswear and retail businesses, and the new Timberland wholesale men’s sportswear business. Partially offsetting this were revenue declines in the Company’s heritage brand outlet retail businesses, which experienced a comparable stores sales decline of 7%. The Calvin Klein outlet retail business experienced comparable store sales growth of 1%. Overall, total outlet retail comparable store sales declined 5% in the third quarter.

Earnings in the third quarter were negatively impacted by the declines in comparable store sales of the heritage outlet retail business and the related decline in gross margin resulting from increased promotional selling given the difficult economic climate. Additionally, there was a shift of $9 million of advertising spending from the fourth quarter to the third quarter impacting both the combined wholesale and retail businesses and Calvin Klein licensing, which celebrated the 40th anniversary of Calvin Klein during the quarter.

Net interest expense in the third quarter increased as a result of the Company utilizing $200 million of cash during the fourth quarter of 2007 to repurchase approximately 5.2 million shares of common stock. This, coupled with lower investment rates, reduced interest income. Offsetting this negative impact was a planned decrease in the effective tax rate for the quarter as compared to the prior year due to certain discrete tax items in the third quarter of 2008.

Nine Months Results

For the nine months, total revenue on a GAAP basis increased 4% to $1,914.1 million in 2008 from $1,840.7 million for the same period in 2007, driven by revenue growth of 18% in the Company’s Calvin Klein licensing business.

For the nine months in 2008, earnings grew 21% in the Company’s Calvin Klein licensing business, which partially offset earnings decreases in the Company’s heritage brand outlet retail and wholesale sportswear businesses. Earnings for the nine months in 2008 were also negatively impacted by $12 million of start-up costs in the first half of the year associated with the Company’s Timberland wholesale men’s sportswear business and Calvin Klein specialty retail stores, an increase of approximately $6 million, or $0.08 per share, compared to $6 million of start-up costs for these businesses in the prior year’s nine months.

Balance Sheet

The Company ended the third quarter with $197.6 million in cash, a decrease of $139.1 million from the prior year’s third quarter. This decrease was driven by the completion of the Company’s $200 million stock repurchase program during the fourth quarter of 2007.

Inventories decreased 1% from the prior year’s third quarter. Inventories at the end of the third quarter of 2008 include an increase of $23 million, or 7%, related to the new Timberland wholesale men’s sportswear business, the opening of additional Calvin Klein specialty retail stores and the recently-acquired Calvin Klein Collection wholesale business. Excluding this increase, inventories were down 8%, which reflects the Company’s continued focus on aggressively managing inventory levels.

Trade receivables ended the quarter 14% above the prior year due principally to the new Timberland wholesale men’s sportswear business and the recently-acquired Calvin Klein Collection wholesale business. Receivables are current and the Company has not experienced a slowing of collections.

2008 Guidance

The Company is revising its previous projection for full year earnings per share, excluding the operating results and exit costs associated with the Company’s Geoffrey Beene outlet retail division, to a range of $3.00 to $3.10. (Please see reconciliation of GAAP to Non-GAAP earnings per share estimates later in this release.) Excluding the operating results and exit costs associated with the Company’s Geoffrey Beene outlet retail division, fourth quarter earnings per share is expected to be in a range of $0.35 to $0.45. (Please see reconciliation of GAAP to Non-GAAP earnings per share estimates later in this release.)

The Company is currently projecting full year GAAP earnings per share to be in a range of $2.71 to $2.81, which includes Geoffrey Beene operating results and exit costs of approximately $24 million pre-tax, or $15 million after tax. For the fourth quarter of 2008, GAAP earnings per share is expected to be $0.23 to $0.33, which includes Geoffrey Beene operating results and exit costs of approximately $10 million pre-tax, or $6 million after tax.

Total GAAP revenue for the full year 2008 is projected to be approximately $2.51 billion to $2.53 billion, an increase of 3% to 4% over 2007. For the fourth quarter, GAAP revenue is expected to be $595 million to $615 million in 2008, an increase of 2% to 5% over the fourth quarter of 2007.

Fourth quarter comparable store sales are planned to be down between 8% and 13% in the Company’s total outlet retail business.

Fourth quarter revenue for the Calvin Klein licensing business is expected to be approximately flat with the prior year, as the continued growth of our licensees’ businesses in local currency is expected to be offset by the impact of a stronger U.S. dollar versus the prior year.

The Company projects that it will end 2008 with approximately $340 million in cash, with cash flow for 2008 of approximately $70 million. Cash flow for 2008 includes approximately $100 million associated with capital spending and acquisitions. The cash flow estimate also includes the one-time costs associated with closing the Company’s Geoffrey Beene outlet retail business, net of the benefit associated with liquidating the working capital of this business.

CEO Comments

Commenting on these results, Emanuel Chirico, Chairman and Chief Executive Officer, noted, "Given the overall economic environment, we are proud of our third quarter performance. The strength and recognition of the Calvin Klein brand across the world continued to drive revenue and earnings. In our Calvin Klein licensing business, revenue increased 9% despite the strengthening U.S. dollar and slowing growth in international markets. Equally as important, we continue to manage our inventory tightly, with an 8% reduction in inventory levels excluding new businesses, which we believe positions us appropriately for the fourth quarter.”

Mr. Chirico continued, "The recent and rapid deterioration in the overall economic environment in the U.S. and abroad has decreased consumer confidence and spending beyond what we had previously anticipated. This, coupled with the significant strengthening of the U.S. dollar, has caused us to lower our fourth quarter and full year guidance. However, even during this very difficult time, our diversified stable of brands continues to generate strong profits and cash flows.”

"The strength of our balance sheet,” Mr. Chirico noted, "which is highlighted by our cash position, significant availability under our revolving credit facility, and no maturities of long-term debt until 2011, provides us with the liquidity that we believe we need to manage our business despite the current volatility in the credit markets. Even in this difficult year, we expect to generate approximately $70 million of cash flow.”

Mr. Chirico continued, "As we look forward, we believe the current economic environment will continue into 2009. As such, we are reviewing our operating structure, real estate portfolio and capital spending programs to identify opportunities to improve our efficiency, generate expense savings and maximize cash flows.”

Mr. Chirico concluded, "We believe we have a solid financial platform that will allow us to continue to invest in our brands for long-term growth. It is this platform, together with the strength of our brands that should allow us to achieve higher growth rates when the economic environment improves.”

⁽¹⁾ Adjustments for the quarter ended November 2, 2008 represent the elimination of the operations of the Company’s Geoffrey Beene outlet retail division and the costs associated with the closing of such division.

⁽²⁾ Please see Note 2a to the Notes to Consolidated Income Statements for the calculations of diluted net income per share.

⁽¹⁾ Adjustments for the nine months ended November 2, 2008 represent the elimination of the operations of the Company’s Geoffrey Beene outlet retail division and the costs associated with the closing of such division.

⁽²⁾ Please see Note 2b to the Notes to Consolidated Income Statements for the calculations of diluted net income per share.

Notes to Consolidated Income Statements:

1. The Company believes presenting its 2008 results excluding the operating results and exit costs associated with the Company’s Geoffrey Beene outlet retail division, which is on a non-GAAP basis, provides useful additional information to investors. The Company believes that the exclusion of such amounts facilitates comparing current results against future results by eliminating amounts that it believes are not comparable between periods, thereby permitting management to evaluate performance and investors to make decisions based on the ongoing operations of the Company. The Company believes that investors often look at ongoing operations of an enterprise as a measure of assessing performance. The Company uses its results excluding these amounts to evaluate its operating performance and to discuss its business with investment institutions, the Company’s Board of Directors and others. Such results are also the basis for certain incentive compensation calculations.

⁽¹⁾ Represents the impact on net income from the elimination of the operating results and exit costs associated with the Company’s Geoffrey Beene outlet retail division.

⁽¹⁾ Represents the impact on net income from the elimination of the operating results and exit costs associated with the Company’s Geoffrey Beene outlet retail division.

The domestic and international components of earnings before interest and taxes were as follows:

⁽¹⁾ Adjustments for the quarter ended November 2, 2008 represent the elimination of the operations of the Company’s Geoffrey Beene outlet retail division and the costs associated with the closing of such division.

⁽²⁾ The results of the Company’s Calvin Klein Collection wholesale business, which was acquired in the fourth quarter of 2007, and corporate expenses not allocated to any reportable segments are included in Other.

The domestic and international components of earnings before interest and taxes were as follows:

⁽¹⁾ Adjustments for the nine months ended November 2, 2008 represent the elimination of the operations of the Company’s Geoffrey Beene outlet retail division and the costs associated with the closing of such division.

⁽²⁾ The results of the Company’s Calvin Klein Collection wholesale business, which was acquired in the fourth quarter of 2007, and corporate expenses not allocated to any reportable segments are included in Other.

PHILLIPS-VAN HEUSEN CORPORATION

Reconciliations of GAAP to non-GAAP 2008 Estimates

The Company believes presenting its estimated 2008 results excluding the operating results and exit costs associated with the Company’s Geoffrey Beene outlet retail division, which is on a non-GAAP basis, provides useful additional information to investors. The Company believes that the exclusion of such amounts facilitates comparing current results against future results by eliminating amounts that it believes are not comparable between periods, thereby permitting management to evaluate performance and investors to make decisions based on the ongoing operations of the Company. The Company believes that investors often look at ongoing operations of an enterprise as a measure of assessing performance. The Company has provided the reconciliations set forth below to present its estimates of earnings per share and operating margin on a GAAP basis and excluding these amounts. The Company uses its results excluding these amounts to evaluate its operating performance and to discuss its business with investment institutions, the Company’s Board of Directors and others. The Company’s earnings per share excluding these amounts are also the basis for certain incentive compensation calculations.