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Klatsky: Cash for Calvin Expansion

Phillips-Van Heusen swung back to the black in the fourth quarter and generated substantial free cash to drive the expansion of the Calvin Klein brand.

NEW YORK — Phillips-Van Heusen Corp. swung back to the black in the fourth quarter and, perhaps more importantly, generated substantial free cash to drive the global expansion of its recently acquired Calvin Klein business.

For the three months ended Feb. 2, the New York-based multibrand apparel and footwear manufacturer reported net income of $5.7 million or 20 cents a diluted share. That compares with last year’s loss of $9.5 million or 34 cents a share. Excluding an aftertax charge of $13.4 million for an accounting change regarding the impairment of goodwill, PVH would have reported profits of $4 million, or 14 cents, in the prior-year quarter. Either way, PVH easily beat the Wall Street consensus estimate by 3 cents.

Sales for the period retreated 3.2 percent to $315.3 million from $325.6 million a year ago.

While the company’s earnings report came after the market closed, PVH investors sensed something was afoot and traded up the firm’s shares 24 cents, or 2 percent, to close at $12.19 in New York Stock Exchange trading.

“Improved margins and operating profits from the apparel and footwear divisions drove the positive earnings comparison,” chief executive officer Bruce Klatsky told WWD. “Our sportswear business in particular has performed exceedingly well. Led by Van Heusen and Izod in the department store channel, it has outperformed the market and outperformed the economy.”

Klatsky added that the dress shirt business maintained its position as the market leader.

With increased efficiencies and a better bottom line, PVH was able to generate strong cash flow that resulted in the company ending the year with $117 million in cash — funds that PVH can use to build Calvin Klein, said Klatsky.

“That is a tremendous amount of cash,” said Klatsky. “The businesses we can grow with Calvin Klein globally with our free cash will contribute substantially to top and bottom line growth.”

Meanwhile, increased operating profits in the apparel segment were driven by overall lower product costs spurred by last year’s reconfiguration of PVH’s sourcing operations, and more full-priced selling, all of which contributed to better gross margins. That led to an operating profit income gain of 12 percent to $2.2 million. In the footwear segment, tight inventory management and cost control allowed operating income to grow 20 percent to $500,000.

Overall, companywide gross margin expanded 360 basis points to 41.9 percent of sales from 38.8 percent a year ago. Tight inventory management throughout the year also allowed PVH to significantly reduce the amount of clearance markdowns, which also contributed a great deal to margin growth.

Regarding Calvin Klein, Klatsky once again cautioned that the acquisition will slightly dilute 2003 earnings per share, as they will be affected by the dividends on preferred stock issued to finance the deal. That, in turn, will reduce net income available to common shareholders. However, Klatsky said the new business has the potential to improve EPS by 15 to 20 percent in 2004 and beyond. He added that although there will be integration costs, Calvin Klein will remain, for the most part, autonomous.

“The Calvin Klein acquisition is not an acquisition based on synergies and cost savings,” Klatsky said. “It is a growth strategy for PVH. We will operate it as a separate entity. We don’t want to integrate it or homogenize it in any way. There may be some synergies in some back-office operations — we’re still looking into it — but that’s it.”

In other positive balance sheet news, more effective working capital management allowed PVH to improve its net debt position by $73 million compared with the prior-year period.

For the full fiscal year, PVH said profits nearly tripled, gaining 185 percent to $30.4 million, or $1.08 a diluted share. That compares with last year’s earnings of $10.7 million or 38 cents. Excluding the charges, last year’s net income would have been $24.1 million, or 86 cents.

Sales for the year slipped 1.9 percent to $1.4 billion from $1.43 billion a year ago.

Excluding an expected first-half restructuring and transition charges of aftertax 45 to 50 cents related to Calvin Klein, PVH forecasts 2003 full-fiscal-year EPS of 95 cents to $1. Net sales are forecast in the range of $1.56 billion to $1.59 billion, with licensing revenues kicking in $115 million to $120 million.