Question-and-Answer Session
Operator
(Operator Instructions) Your first call comes from Todd Slater – Lazard Capital.
Todd Slater – Lazard Capital
My first question is just about the guidance. I think you're about $0.28 year to date and you maintain your annual guidance of $0.32 to $0.36 which means a fourth quarter of $0.06 to $0.12, and you said you see no discernable change in demand, so I'm wondering if the fourth quarter revs are in line where we think they are and where the third quarter, is there something about the fourth quarter in terms of profit either on the margin, gross margin side or leverage side that you think is going to change sequentially? I know we're focused on year over year but given the same type of revenue, what would cause that much of a contraction in the margin if you were to hit those numbers.
Adrian Kowalewski
One of the things you have to keep in mind is that our wholesale business typically trails off in the Q4 and if you look at just the trend of earnings last year, there was a deceleration of profitability in the fourth quarter as we manufacture more winter styles and more retail styles. So it's both a revenue issue and a margin issue.
Todd Slater – Lazard Capital
So if wholesale trails off isn't the wholesale a lower margins business, so wouldn't that positively impact the overall gross margin and net margin?
Dov Charney
We want to be conservative. We don't want to over promise. It's very difficult to calibrate a factory of this many people. We have thousands of employees. If you run into too much overtime, your profit really drops. You could also have an under deployment problem in the factory where if you're running it for four and a half days for example, your profitability drops again because you're not getting leverage on all of the overhead costs of the factory.
So it's a difficult moment to calibrate everything. We think we're going to be successful, and if we're more successful you'll have the upside. If it's not, at least we'll make what we originally said we would make. So we don't want to raise the target for ourselves unnecessarily. We're directing a very large scale manufacturing operation. It's one of the largest clothing factories now in the world.
We're doing a good job at it. We have the new ERP system, some elements of the ERP system in place and each year we'll get better at it. But this is a complex moment for everybody, and we ought to see where there's acceleration, deceleration and so forth in terms of which products are working and which products are not. We're also integrating a lot of new employees, so there's an issue here. But we'll see how it goes.
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