PVH Corp (PVH) 2010 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to today's Phillips-Van Heusen second quarter earnings call.

Just as a reminder, today's call is being with recorded.

And 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 having any comments or statements you make appear on any transcript or broadcast of this call.

The information made available on this webcast and conference will contain certain forward-looking statements, which reflect PVH's view of future events and financial performance, as of September 7, 2010.

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 its 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.

The information made available also includes certain non-GAAP financial measures, as defined under SEC rules.

A reconciliation of these measures is included in the Company's earnings release, which can be found on the Company's website, www.PVH.com, and in the Company's current report on Form 8-K, furnished to the SEC, in advance of this webcast and call.

At this time, it is now my pleasure to turn it over to your host, Mr.

Manny Chirico.

Please go ahead, sir.

Thank you very much.

Good morning, everyone.

Joining me on the call, 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.

I guess I'd like to start the call by saying how happy we are with the results for the second quarter.

We posted a 20% increase in earnings per share over the prior year, and we significantly exceeded the top end of our earnings guidance.

We beat our earnings guidance at the top end by about $0.20 a share.

And I would just like to characterize that, and put that into three major categories.

Our Tommy Hilfiger business significantly exceeded both its sales, and its operating profit expectations in the quarter.

I'll put more color on that in a moment.

On an earnings per share basis, the Tommy business exceeded our previous guidance by about $0.15 a share.

Our Calvin Klein, and our Heritage businesses, the combination of our standalone PVH business, also had a very strong quarter.

And on an earnings per share basis beat the top end of our guidance by about $0.12 a share.

On the corporate line, we had a favorable benefit on the interest, which was a couple of pennies.

And then on the tax line, we had a miss of about $0.09 a share, which was really driven by the significant outperformance of our US-based businesses, which drove our second quarter tax provision, effective tax rate, to be about 5 to 6 points higher than we initially anticipated for the quarter.

Mike will talk about that in more detail, when we get into our -- get into his conference call comments.

I'd like to touch on the three main components of our business.

Let me start with the Tommy Hilfiger business.

And I'm going to start with the largest business which is our Wholesale European Tommy business.

It represents about 35% of our business, on an annual basis, a little bit over $800 million in sales.

Our sales projections for Tommy assume that revenues will grow about 6%.

Our fall order book, which we began shipping in May, and will continue to ship through probably early December, is running up about 10%.

In addition, our current basic replenishment businesses are very strong, and business is very healthy.

If you look at it on a product category basis, our footwear business is up about 15%, and that's a category that Tommy took in-house a little bit over two years ago, and is running well in excess of $100 million this year.

Our denim business is up about 10%.

Men's sportswear is tracking up about 12%.

Women's is running ahead about 7%, and our children's business is flat, compared to the prior period last year, spring period.

If you look at it on a country basis, let me start first with our countries, where Tommy has a very strong leading position, and the local economies are relatively stable.

This tends to be northern, central Europe.

Our largest business, Germany, which represents about 25% of the European business, overall business is up, sales are up about 15% in Germany.

If you look at some of the other major countries, Scandinavia, Austria, Belgium and the Netherlands, business is anywhere up from 5% to 17% in those countries, on average in those countries business is ahead about 10%.

In countries where we are underdeveloped as a brand, and we have targeted for growth, we're seeing significant growth in those countries.

In France, we're running ahead about 25%.

In the UK, we're running ahead in excess of 50%.

Our Middle East and Russian business is running ahead 10%.

And our Italian business, which is clearly an economy that's being challenged, is running up 8% for the spring season.

I guess if you move to second group of countries, countries that we have a very strong position in, but where the economies are being challenged pretty significantly, and our market share there continues to grow, even though we're posting some negative comparisons.

In Spain, which is clearly an economy that's been under -- has been challenged, our spring business is down about 5%.

In Ireland, another economy that's very challenged, our business is down about 7%.

In Portugal, which similar to Spain, a relatively small business is down about 10%.

But overall, as we look at the fall bookings, we're seeing business up in excess of 10%, against a sales plan that's planned at about 6%.

So clearly, we see upside, as we go to the balance of the year.

As we look out to spring 2011, which we'll begin to ship in this year's fourth quarter, our spring order book is running ahead about 9%, over spring 2010.

And just focusing on the two largest countries, Germany is running ahead about 8%.

And Spain, which is our second largest market, has really -- the market has stabilized there, and we're seeing a resumption of our growth there in business, and orders there, look like the spring it will be up about 8%.

Overall, growth is very consistent on a country by country basis, as we look out to spring 2011, and we're seeing growth in every major European market that we're operating in.

Moving on to our European Wholesale business.

During the second quarter, our European like-for-like sales were down about 1%.

We were up against a significant amount of clearance sales from last year.

Retail inventories on average during the quarter were down about 10%.

And gross margins are running ahead about 500 basis points, ahead of the prior year.

As we have come into August, with the prior year clearance sales behind us, we have begun to see a dramatic improvement in the European comp store sales.

For the first five weeks of the third quarter, like-for-like store sales in Europe are running ahead about 10%, which is well ahead of our third quarter sales plan of about plus 2%.

Inventory levels are very much under control, and gross margins continue to be very strong in the retail component.

Moving to North America, in our retail component, which is the largest component of our North American business, we saw a very strong performance in our Tommy retail business.

Comps were up about 8% in North America, margins and profits were significantly ahead of plan for the second quarter.

This strong trend has continued into the third quarter, where comps are running up about 9% for the first five weeks of the quarter.

This business is being planned up about 5% for the third quarter, so we're clearly running ahead of projections here, both from a sales and a gross margin performance.

At Wholesale in the US, our Macy's business is planned up about 5%.

We are consistently running ahead of plan at Macy's.

We are seeing strong sell-throughs at retail, and margins for the second quarter.

We also are seeing for the first month of the third quarter, that those business trends have continued.

We continue to see good performance at Macy's, and we believe our long-term growth prospects with Macy's continue to be very positive, as we move forward.

So in sum, I'd just say that the Tommy business clearly outperformed our expectations for the second quarter, both on a top line and a bottom line basis.

We beat the top line somewhere in the neighborhood of $15 million to $20 million.

And we beat the bottom line, by about $17 million on our -- on the guidance that we gave.

So we clearly had a very strong performance, and those trends continue into the third quarter.

Our Calvin Klein business also continued its strong growth momentum in the second quarter.

Total revenues for our combined Calvin Klein businesses were up 14% for the quarter.

And operating profits increased over 20% for the quarter.

Focusing on our licensing segment, revenues were up about 13% on a constant currency basis.

And I am going to put some color on some of our larger businesses.

I am going to start with our underwear business, which is run by Warnaco, the business was ahead about 20% in the quarter.

In constant dollars, all regions, Europe, Asia, and the Americas posted double-digit increases.

The growth was driven by a continued expansion of retail square footage, and the very successful launch of Calvin Klein X in men's.

We are very pleased with the result of Calvin Klein X to date.

And the strong sales performance is contributing to significant market share gains.

In the US, for the first six months of the year, Calvin Klein picked up 2 full share points in men's bottoms, based on the strength of this program.

The second phase of the marketing campaign associated with X is launching as we speak.

And Warnaco is shipping in X Elements, a fashion collection in the third quarter.

So we're very positive about the Calvin Klein X business, and the strength of the men's underwear business, in both US and internationally.

On the women's side of the business, we are just shipping the new Envy program, and the advertising campaign featuring Zoe Saldana, will break in early September.

The Envy campaign includes significant print, outdoor, and an exciting digital component.

We're also exploring the addition of TV and cinema for the fourth quarter.

The preliminary selling of Envy is very encouraging, and we believe the marketing campaign could be breakthrough.

So we're very optimistic about the customer response, and feel very strong about the way this product is being positioned at retail and the initial sell-ins.

So the underwear business, very strong performance in the second quarter, and those trends continue into the third.

Our jeans business, which is our largest single category business, was up about 8% in the quarter -- in the second quarter, led by double-digit growth in Latin America and Asia.

The growth was fueled by the expansion of retail square footage in international markets, principally internationally in Asia and South America.

The Whitewash jeans campaign, which was introduced for spring 2010, had a very strong response, as reflected in our second quarter results.

We are currently delivering our fall Calvin Klein jean product anchored by our introduction of X Jeans, targeted for a slightly younger men and women customer, as the fit of the new jean represents our slimmest and sexiest fitting jean.

This introduction will be supported with powerful in-store signage, product presentation, and a global marketing campaign that was launched in July.

Additional marketing support for the X Jean campaign will include magazine and billboard, as well as a new digital component.

So we're very excited about our Jean component of the business.

And we believe, particularly internationally, that this -- this growth will continue.

And it's really being fueled both by product introductions, and the significant increase in square footage for Calvin Klein throughout Asia and South America.

Moving on to our fragrance business, we had a strong second quarter in fragrance.

We posted 12% increase in revenues.

The major news in fragrance, is the launch of Calvin Klein Beauty, which starts shipping in September.

The sell-in at retail has been very strong, both in the US and in international markets.

Coty is planning to spend something -- some amount in excess of $40 million on the launch of Calvin Klein Beauty.

The campaign features Diane Kruger as our celebrity spokesmodel.

The campaign will have a major print and outdoor component, as well as a significant television buy, for the all-important fourth quarter holiday period.

We're very excited about the initial sell-in of Calvin Klein Beauty.

We are excited about the marketing campaign that Coty has, and we believe that this growth will continue to fuel the resurgence of our fragrance business.

Moving on to our US women's apparel business.

Our licensee, G3, saw its royalties grow over 30% in the quarter.

The performance was driven by strong growth in women's sportswear, and women's dresses, in particular.

And we continue to believe that this growth will continue into the third and fourth quarter this year.

G3 has done an outstanding job in the product categories dresses, women's, sportswear, suits, and in both men's and women's outerwear for us.

So we have just really seen a resurgence there in that business, and it continues to grow.

And we believe we're very well positioned, particularly in the women's sportswear business, over the next two or three years to see a significant amount of growth in that women's sportswear category.

Moving on to our Calvin Klein apparel businesses that we operate directly, our retail, our Wholesale sportswear and dress furnishings business, we saw our sales in this component of the business, grow 17% in the second quarter.

The strong performance was driven by our men's sportswear business, which saw a 20% sales increase in the quarter, as well as a very strong performance in our owned retail stores.

Our Calvin Klein retail business posted a 14% comp store increase in the second quarter.

That strong trend continued into the first five weeks of the third quarter, with comp sales posting a 12% increase, compared to our plan of plus 7% to 8% for Calvin Klein.

So here, Calvin Klein momentum continues.

We continue to believe, we can outperform our third and fourth quarter projections.

And there's a lot of momentum behind the Calvin Klein brand, and significant advertising and marketing campaigns, associated with new product launches for the third and fourth quarter, that we feel will help all of our businesses.

Moving on to our Heritage businesses.

Our Heritage businesses also had a very strong second quarter.

Sales for the quarter were up about 4.5%, with operating profits up about 11%.

Our Wholesale businesses have continued to have very strong performances at retail, and we are projecting our overall Wholesale businesses to grow about 15% in the second half of the year.

We are projecting significant growth for IZOD, Van Heusen, Arrow and Timberland, with our key customers.

We believe this growth is being driven by delivering great product, with a great value proposition to our consumers.

And we also believe we're getting significant payback for our marketing investments, particularly in IZOD and Van Heusen, where we have consistently been spending marketing dollars over the last four years.

And we believe those marketing dollars are paying dividends, as we are gaining market share with all of our major customers.

Moving to our Heritage retail business, second quarter store sales comps posted an 11% increase.

This strong sales trend continued into the first five weeks of the third quarter, with comp stores posting 8% increase against our plan of about plus 5%.

So our Heritage businesses, both wholesale and retail, the momentum continues in those businesses.

We feel very positive about the trends in those businesses.

And we feel strongly, that it will support our growth as we go forward.

Looking at our total year guidance that we gave, we've taken our guidance up to $3.70 to $3.80 a share.

That's a $0.15 increase in the -- in our earnings per share.

And it includes a couple of key components, that I would just like to bring you up to speed on.

We've increased our marketing spend, a big portion of that, about 70% of it is focused on Tommy -- on our Tommy Hilfiger brand.

So we've increased our advertising commitment for the second half of the year by about $15 million, or $0.15 a share.

Our Tommy Hilfiger business, excluding the advertising -- additional advertising expense, is up about $10 million, compared to our original guidance.

Our Calvin Klein, and our Heritage businesses have seen significant growth.

And our -- as I mentioned, our Wholesale businesses in particular, are performing very strongly, with orders and sales going up in the third and fourth quarter.

Those two businesses, CK and our Heritage businesses, will contribute about $0.25 more, from a guidance point of view, from where we were initially.

Interest will be about a $0.05 savings for us.

And then taxes, will cost us about $0.10 a share, as again the US portion of our revenues are exceeding our initial tax rate guidance.

Our overall tax rate should be about 34%, compared to our initial guidance of about $0.32 -- or 32%.

So with that, I'll ask Mike to quantify, with a little more detail, some of the businesses.

And then we'll take some Q&A, and go forward.

Mike?

Thanks, Manny.

The comments I'm about to make are based on non-GAAP results, and are reconciled in our press release.

Total revenues for the second quarter were $1.1 billion, or $574 million greater than the prior year.

Driving this increase was our Tommy Hilfiger businesses which were $532 million, as well as the increase in our combined Calvin Klein and Heritage businesses of 8%.

Our Tommy Hilfiger businesses performed ahead of plan, both domestically and internationally at both wholesale and retail.

Our Calvin Klein outlet comp sales were plus 14 for the second quarter, and our Heritage business had a comp of 11%.

Our Wholesale businesses were on plan, and 2% ahead of last year.

In addition, our Calvin Klein licensing segment had royalty revenue growth of 11%, as virtually all product categories exhibited strong performance.

Our earnings per share for the quarter was $0.72, versus last year at $0.60.

We were 20% ahead of last year, and $0.20 ahead of the top end of our previous guidance.

Tommy Hilfiger earnings for the quarter were very strong.

We were $16 million ahead of our Tommy Hilfiger guidance.

Earnings were driven by strong US comps and strong gross margins, both domestically and internationally.

Also contributing to this increase was a shift in the timing of certain Tommy Hilfiger expenses of approximately $5 million, that were planned to occur in the second quarter, but are now expected to be incurred in the second half of the year.

Our Calvin Klein and Heritage businesses also had strong performance, with a combined EBIT improvement of 17%, versus the prior year.

Strong revenue growth, coupled with strong gross margins, drove the increase.

Our Heritage business also recognized an additional $10 million of planned advertising in the second quarter, as IZOD continues to support and grow relationships with the Indy Racing League.

Our tax rate for the quarter was 37.6%, significantly higher than our guidance, which was 30%.

Our tax rate was driven higher, primarily as a result of our domestic operations, which are taxed at a higher rate than our international operations, generating a larger portion of pre-tax income in the second quarter than we had anticipated.

Just to put some additional color on taxes.

We had made some original assumptions that acquisition in terms of how revenues and expenses were going to be recognized geographically.

As we got into it, and laid out the numbers, we did have shifts in our revenue, our EBIT recognition, the US got stronger, North America got stronger at a quicker pace than Europe.

But we also have revised our assumptions on how some of the expenses, marketing, and some other big categories of expenses, would be shared geographically.

And that was also a factor in how our tax rate changed for the quarter, and for the year.

On the balance sheet, our inventories are very clean and on plan.

Inventories related to our Calvin Klein and Heritage businesses ended the second quarter up approximately 13% over the prior year, and are in line with our third quarter revenue guidance.

As a result of increased demand and anticipated delays in production, we've taken the position in dress shirts to accelerate the intake of core or basic product, which carries no markdown liability.

If we exclude dress shirts, our Calvin Klein and Heritage businesses, the inventories, are up about 6% at the end of the second quarter.

Our receivables ended the quarter very clean, both domestically and internationally as well.

We made a $100 million debt repayment against our newly issued term loans prior to the end of the second quarter.

And we plan on making additional repayments in the fourth quarter of approximately $300 million, which is ahead of our original plan.

As we look forward, we're continuing to feel very good about the balance of the year.

For the third quarter, we're estimating our revenues to be approximately $1.42 billion to $1.44 billion.

The third quarter -- which is an increase of $730 million over the prior year.

Driving the revenue increase, is the revenues associated with Tommy Hilfiger at $655 million, and a 12% to 13% increase in our combined Heritage and Calvin businesses.

Comp sales for our combined Heritage and Calvin Klein outlet retail business are projected to increase 5% to 6%.

Calvin Klein royalty revenue is planned at plus 7%, or 9% on a constant currency.

Earnings for the third quarter is projected to be $1.37 to $1.42.

Our earnings reflect Tommy Hilfiger EBIT of $75 million to $80 million, or an operating margin of 11% to 12%, and an improvement in operating income in our combined Heritage and Calvin Klein businesses of about 10% to 11%.

For the year, we're projecting revenues of $4.44 billion to $4.47 billion.

Our revenues reflect Tommy Hilfiger revenues of $1.81 billion to $1.83 billion, and an increase in our combined Calvin Klein and Heritage businesses of 10% to 11%.

Comp sales for combined Heritage and Calvin Klein outlet retail businesses are projected to increase 7% to 8%.

We're projecting Calvin Klein royalty growth of 8% to 9%, or 9% to 10% on a constant currency basis.

Earnings per share is projected to be $3.70 to $3.80, which is $0.15 greater than our previous guidance, and includes an additional $15 million in marketing expenses.

The Tommy Hilfiger businesses are projected to have EBIT of $180 million to $190 million, or an operating margin of about 10% to 11%, inclusive of the higher ad spending.

Our tax rate for the year is projected to be 34% to 35%, up from our previous guidance, as we've discussed.

One last note, we've made great progress on integrating the Tommy Hilfiger US operations.

Our PVH and Tommy teams have laid out a solid plan, and we're very much on track to attain our $40 million in synergies.

Overall, our savings are still being generated from elimination of duplicate functions in the US.

We're very much on target for those sales.

And with that, we will open it up to questions.

Thank you, sir.

(Operator Instructions).

We'll take our first question from Bob Drbul from Barclays Capital.

Morning.

The question that I had, Manny, could you first maybe just address -- on when you look at, when it's all said and done for the new numbers, the accretion, like the $0.20 to $0.25 you had planned for Tommy, I mean could you give us an update when it's all fleshed out, where you see that for this year now, in the new numbers?

And I guess, could you also just provide any more insights around, the accretion expectation for next year or updated thoughts?

Sure, Bob.

I guess for this year, given the significantly stronger cash flows that are being generated in the business, and the associated earnings interest savings that go along with that, the (inaudible) transaction, the $0.20 to $0.25, looks more like $0.30 to $0.35 right now.

And it's really being driven -- and that includes spending the extra $10 million or $11 million on marketing expenses on the Tommy Hilfiger.

So we feel good about that business, and the accretion.

As I look out to next year, we haven't done another path at next year's earnings.

We'll probably do that in the fourth quarter, as part of our strategic planning.

But I guess I'll make a couple of points, to try and put it into some reference.

Clearly from an operating point of view, from a performance point of view, we're outperforming the business plan, and that should be a benefit as we go into next year.

The big negative against the $0.75 to $1.00, is the $0.75 to $1.00 was put together when the euro was much closer to $1.40.

Today it's more like $1.27.

So that impact has to be weighted in.

And when you put it all together, I don't know exactly what it's going to stay, but we would expect the first quarter, which is missing from this year, is a very strong, profitable quarter for the Tommy business, as well as the PVH business.

So that would clearly be a significant additive.

So each penny of currency hit for the full-year next year is worth about a $0.015 to $0.02.

So it gives you a sense, of what the currency impact could be on us the next year, something like $0.20 to $0.25 against us.

Offsetting that is the stronger performance, in the business itself.

Got it.

And when you look at the acceleration of the European retail comps, Manny, can you provide a little bit more flavor to where the biggest deltas were, over the last five weeks versus the prior quarter?

And sort of what were the biggest levers that you saw change?

I think I would say, first and foremost, the biggest lever wasn't driven by geography.

It was driven by inventory position, not only of our business, of the Tommy business, but also of what the competitive set was like a year ago.

If you go back to May, June, July of 2009, clearly, that was probably the height of the pressure that was going on from a consumer point of view in the European market.

And there was a significant -- there was an over-inventory position overall in the market, and Tommy was dealing with liquidating inventory as well.

So there was tremendous -- there was significantly more sales going on.

The sales periods extended longer.

The promotion call-outs were higher, deeper, and more intense, and that clearly reflected itself in the business last year.

We were up against those tough comparisons from a sales point of view, but clearly got the benefit on the gross margin, at about 500 basis points.

As I look at comps, I could tell you that -- the comp performance for the month of August in Europe was pretty consistent to what you would have expect -- expected.

The northern economies of Europe, and the central European economies, those were the areas where we had our strongest comp store performance.

Germany, Holland, Netherlands, Scandinavia, those are some of our best performances, but as I look at the screen, it's hard to find any real red numbers of any significance on the screen, for the first five months -- five weeks of the third quarter.

So it's been a complete turnaround in Europe, very positive sales performance, and it shows no signs of slowing up.

Great.

And then Manny, my last question is, essentially, when you keep adding to the advertising and marketing plans, when you look at this year's full numbers, is the level that you're now planning at, the level that we should think is an ongoing basis?

Or how should we think about that sort of expense piece of the business?

Well, Bob, I think so far this year, besides -- we've increased the marketing spend.

We're spending more than we did in the prior year on the PVH legacy businesses.

We've intensified the Calvin spend.

They did that themselves, and we've added to it.

I think is -- if the business continues its momentum, we will continue to invest in marketing.

If we were to see, for whatever set of circumstances, some potential pullback in the business, there's clearly room if we start to feel tightness, or if we saw consumer significantly back off, there's clearly room for us to back off to some degree on marketing spend, since we are spending on a brand by brand level, what I would consider record levels for us.

So we really feel good about the spend.

We think we've demonstrated, both in dress shirt and dress furnishings area, where we've seen dramatic market share gains over the last three years.

And in the sportswear area, particularly in the two brands where we've invested heavily, Van Heusen and IZOD, we've clearly seen strong market share gains with our major customers, Macy's, JC Penney, and really across the board with our department store count, where we've really been able to maintain market share.

The marketing campaigns we have, are really not only national campaigns, they're also regional campaigns, in that we do it at point of sale.

With IZOD, we bring drivers into the store, to really try to promote the events that are going on around the store.

We believe it drives business, and we see it in our results.

Our second half order book, and as we're filling in those orders we'll be up well over double-digit in our Heritage business.

Which if you think about it, is supposed to be a slow growth business.

So we're very positive about the marketing investment, and the return on that investment.

Thank you.

And we'll take our next question from David Glick from Buckingham Research Group.

Congratulations on the quarter, and the progress in Tommy Hilfiger.

Manny, some helpful thoughts on the accretion for next year.

I just wondered if you can update us on your thoughts on the cost inflation question, and the pressures there?

And what you see as the puts and takes on the operating margin line for 2011?

Obviously, you have your highest margin businesses growing at a very rapid rate, so you have some mix benefits.

You've got the negative of cost inflation.

Can you kind of give us some thoughts on how you're thinking about the opportunity to continue to expand operating margins going forward?

Sure.

I think -- let me just, in our world, by ourselves, look, -- I think that we have an audience that really knows the industry.

There's been a number of investor conferences, and conference calls, so I'm not going to take you through why cost increases we're seeing in the product.

I think you all know it well, from labor to raw materials and transportation issues that are being dealt with.

I'll just take a step back.

I guess just to think about us.

Depending on the product category, we're looking at cost increases for 2011 that will be somewhere between 3% and 8%.

I guess on average, around 5%.

If you think about the big categories, I think wovens will be under less pressure than knits, and will be under less pressure, than let's say, the bottoms businesses.

And I think -- we tend to be a very strong woven house, so that plays to our advantage.

I think, if you think about bringing together two companies that were large to begin with, both doing about $2.5 million in sales, bringing those together, there's kinds of efficiencies from a logistics and a sourcing point of view, that we'll bring to the table, that can mitigate some of that cost increases.

And I think pricing will also be an area where we'll be able to mitigate some of the pricing, cost increases that we're seeing.

We're going to be very selective there.

We understand the consumer is under pressure.

We are testing price increases with a number of our brands, as we go into the fall holiday season, to see how that -- moving MSRPs and moving promotional cadence, to see how we react to that, and to see what benefits may come from that.

So we're clearly experimenting with all the levers.

I believe that, from a positioning point of view, competitively, we have to be in one of the best positions going forward on a comparison basis.

Just from the fact of putting two, $2.5 billion companies together, the leverage we get, the size of our pencil, and the way we can intensify our order flow to key factories, in order to maintain pricing or mitigate against the pricing increase, puts us in a great position.

And I think our exposure from a currency point of view is significantly less than, what probably our competitive forces have to deal with as we go forward.

So I think that, coupled with pricing, it's clearly going to be a challenge for next year, but I think we're in a very good position to deal with it.

And as far as some of the mix benefits, owning Tommy for a full-year, obviously that's a benefit as well?

Well, yes, okay, look, on a comparative basis, being able to take probably the second strongest quarter, that's not included this year, and putting that into the mix next year, that will be a big benefit for next year.

Coupled with, clearly, the cost savings that we're talking about, that Mike spoke about, the potential $40 million, that's going to intensify and accelerate as we go forward next year.

Not on the operating profit line, but on the EPS line, clearly instead of paying down what we estimated was closer to $200 million, now we're seeing in excess of $400 million.

That clearly has, not only a balance sheet benefit, but that also has an earnings per share benefit as we go forward.

So I think we clearly have some arrows in our weapons to offset some of the price increases, as we go forward.

Great.

And also, Manny, thanks for that color, a follow-up on bookings.

You talked about Europe being very strong.

What are you seeing in the US?

You've been through most of your markets now.

And are those market share increases extending into your bookings in Calvin, and your Heritage businesses in the US, for the spring of 2011?

We're seeing -- we're seeing a strong follow-up for spring 2011 and beyond.

Indications from our retail customers, I guess just a couple of things.

We don't tend to talk about North America, US order books, because of the lack of certainty that goes with that business in general, as an industry.

So our projections we've got orders, and we have a significant amount of -- very significant amount of, EDI, basically replenishment businesses in dress furnishings.

So we never really talk about that in any great length.

But it's running in the mid single digits up, somewhere in the 5% to 7% range, as we look out when you factor in Calvin, and kind of increases we're seeing in North America.

So we feel good about that.

The momentum is good.

When you talk about orders in Europe, orders are real orders that customers stand behind, and it's very unusual to get cancellations.

Can't say the same for the US market.

Okay.

And last, but not least, Mike, on the tax rate going forward, how should we think about that?

And any help on projecting gross margins for the second half versus last year, obviously very strong performance in Q2?

And how do we think about gross margin versus SG&A in the second half?

Okay.

Tax rates for the second half, obviously, the way our taxes work, is for the third quarter we tend to recognize statutory reductions.

So our third quarter tends to be the lowest quarter in the year.

I think of that quarter somewhere around 35 to 36, bringing the year down to some -- I'm sorry.

I think of the third quarter about 31%, bringing the year to about the 34, 35, we talked about.

Okay.

And then in terms of gross margin and SG&A?

Gross margin and SG&A, we had a phenomenal second quarter, in terms of gross margin.

We were up about 500 basis points.

As you move through the third and fourth quarter, we'll see those gross margins continue to improve, but not to those levels.

We'll look at something closer to 200 to 300 points, as we move into the third and fourth quarter.

Okay.

And then as far as tax planning for next year, any improvement on this year?

I -- we get -- there's a lot going on there.

We've got ups and downs.

We get the benefit of the Europe business as Manny said, the second strongest quarter in the year.

So we're working through it, David.

I feel good about our -- I feel good about the rate holding in that -- in the range we're at this year, for now.

Great.

Thanks a lot.

Really appreciate it, and good luck.

And we'll take a question from Omar Saad from Credit Suisse.

Thanks.

Good morning, great job.

Tommy Hilfiger margins, I was a little bit surprised that the US margin was above the international piece this quarter.

Is that a currency issue?

Is that seasonality issue?

And if you could kind of update us on the profitability outlook for the Tommy Hilfiger business?

I know that one of the things that attracted to you was the high level of margins, and the lack of discounting in the Europe and international pieces.

If you could kind of just give us an update, and help us understand the margin dynamics in the Tommy business?

We talked about this on the last conference call.

The second quarter, by far is the -- from a seasonality point of view, is the international business' weakest quarter.

It is not indicative of the overall profitability.

Clearly, the business is 75% Wholesale.

And when you think about the months that are included, May, June and July, those aren't the largest shipping months that we have.

So there's a fixed income expense component in there, that impacts the business.

As we look out, for this current year, we're planning the international business at about a 10% operating margin, 10% to 11% in the US, and about a 9% to 10%, so we'll be someplace around 10% to 11% operating margin overall.

And when we think about next year when we have the full 12 months in, I think it's much closer -- the European business will be closer to 12% to 14% operating margin.

The US will be closer to a 9% to 11%.

When you put it all together, we should be about 11% to 12% operating income margin for the business.

Got it.

That's very helpful.

Did you guys -- sorry if I missed it, but did you guys talk about the currency impact on sales and profitability, coming out of the Tommy business this quarter?

It's hard to talk about it, because there's no -- we're only showing one year on the Tommy business.

We originally projected currencies to be in the $1.20 to $1.25 range.

We were on the high end of that on average for the quarter.

So it was a slight benefit, I would say a couple of pennies in the second quarter against guidance.

And since we're not comparing against the prior year, it's hard to really talk about that any further.

Okay.

Great.

One last question.

There's been a lot made about -- switching gears to the Calvin Klein piece -- the denim cycles, and there's some worries that there's a lot of discounting going on out there, and that we have the strong denim trends that we've been in.

Do you think -- do you have a view on how that could impact the Calvin Klein jeans business?

Well, I think -- I guess -- I think you have to break the markets, when you think about it.

I think in north -- in US, in particular, I read the same stories and heard the same type of focus on the -- on jeans and denim being under pressure.

I think you that have to remember the Warnaco jeans business, about 50% of it is tops.

And that portion of the business is exceedingly strong, and I think that will continue.

So I think is -- it's factored into our projections.

From an international point of view -- I think our price positioning in the US, where we target retails at 59, 69 and 79, I think we're in the sweet spot of the market from a designer Jean point of view, and are gaining market share in the US in a tougher market.

We also get paid on royalties on sales.

We don't get paid on gross margins, so we don't have that exposure, that if you were operating the business, you might have gross margin support.

And you would be dealt with, to move through some goods.

We don't have that exposure in our business for the Calvin consumer.

Internationally, I think it's a different story.

And I think the positioning of the Calvin Klein brand internationally, at the price point that it's at, it's clearly a fashion driver.

I think that business will continue to be very strong.

It's being driven by good Wholesale business, but retail square footage growth overall, that's probably in excess of 25%.

We're adding, in total, for Calvin Klein, probably close to 150,000 square feet worldwide globally for the brand, and in jeans, that's a significant portion of that expansion.

Thanks very much.

Congratulations.

Thank you.

And we'll take our next question from Kate McShane from Citi Investment Research.

Thank you.

Good morning.

It appears that your guidance that you gave today, is taking into account the beat for the quarter with the offset for the ad spend and the taxes.

And it doesn't seem like you've changed your outlook for the back half, compared to when you gave guidance back in May.

Is this the right way to think about it?

And what are you thinking about the business in the back half now, compared to what you were thinking back in May, when perhaps there was a little bit more consumer confidence?

We haven't -- I guess I would say a couple of things.

If you factor in the $15 million of additional advertising, and if you factor in the hit that we took on the tax rate against our guidance of about $0.10, I think you'll see that we clearly have not only -- we've taken up overall, the third and fourth quarter.

And I want to be honest.

Not to the level, or the current trends that we're seeing in the business, but we've taken it up against the guidance that we gave three months ago.

And tried to factor in some of that improvement, and we have rode through all of the beat that took place in the second quarter, and then anticipated some additional benefit of that in the third and fourth quarter.

Clearly, not to the level that we are seeing in the actual business, on a quarter-to-date basis.

And part of that, is conservatism.

Part of that is, we are going to start to cycle, and we've just started to cycle last week or so, much tougher comp store comparisons.

Our comp stores in 2009, improved significantly in the third and fourth quarter of last year.

We're up against that.

We seem to be cycling that pretty well, and putting on increases on top of that.

But again, until we can get a little bit more history there, we're not going to get too far ahead of ourselves.

I think I answered your question, Kate.

Yes, you did.

Thank you very much.

And the second question I had, was I think I heard you say, Manny, that you saw 20% growth in the Calvin Klein men's sportswear business?

What is that being driven primarily by, and are you selling into any channels this year, that you weren't selling into last year?

There's no new customers.

There's a few new doors with existing customers with Dillard's and Macy's adding a few doors.

But it's really being driven by -- it's being driven at the door level by comp store growth.

We're also gaining some square footage in key doors.

And we had an out -- if you just go back, we had an outstanding fourth quarter last year, and a very strong first and second quarter this year.

So it's good performance really fuels itself, particularly when you control the space.

And with Calvin, we're totally in control of the space, the shops, the marketing environment, and we can intensify the inventory build in partnership with our key retailers, it's much easier to control.

So we've really been able to get behind the sales growth quicker in that business, than some of our other businesses where we've outperformed at retail, to really capture the sales even quicker.

I think you're seeing it also in the IZOD and Van Heusen business, but it's actually happening a quarter later, because we don't -- because those are classification main floor brands.

We don't control the square footage.

It takes a little bit longer to cycle the inventory to get your open to buy dollars opened up, to really commit to it.

And Calvin Klein is Calvin Klein, it gets most favored nation treatment everywhere as a brand.

So we're able to -- when we see strong selling, we're able to react even quicker to that brand.

Okay.

Great.

And then my last question is on inventories, now we're up about 13% during the quarter.

Are there certain categories, where inventories were higher than others?

Yes, Kate, it's Mike.

The big driver there was the dress shirt inventories.

We were chasing goods all last year.

We made a decision this year, that we were going to be more in stock on the basics, the core products, the products that carry no markdown liabilities.

We've been heavier throughout the year, and the investment has paid a nice return for us.

We continue to invest in that business.

When you pull out the dress shirt business, inventories, our legacy and Calvin businesses were up about 6% (inaudible).

So, 13 in total, against an 11% sales increase.

So I think it holds on its own, but if you pull out the dress shirts, we're up about 6%.

Okay.

Thank you.

And we'll take our next question from Jeff Klinefelter from Piper Jaffray.

Hi, yes, thank you.

And congratulations on a great quarter.

I just have a couple quick questions.

One would be on the European business, Manny.

Noting the trends for your two largest markets, Germany and France, going into spring 2011 bookings, both being up high single digits, could you touch on Spain specifically?

I mean, that's quite a reversal from the trend this year.

Are you seeing just lapping tough comparisons is helping?

Are you seeing an actual increase in floor space in doors, with the Wholesale side of it, the retail side of it, is it traffic pickup?

Is it AUR stabilization?

Just a little bit more detail around the Spain recovery.

And then the other question would be on Asia.

Could you touch a little bit there, for the Tommy brand, what you are planning for Asian expansion, over the next year or two?

Thank you.

Sure, okay.

Let me -- the two largest markets, just to clarify are Germany and France.

Germany and Spain, you said France, and I said it too.

It's Germany and Spain, I apologize.

Germany, about 25% of the business, Spain about 15% of the business.

And I think -- Jeff, you answered the question, probably better than I could.

You really hit the high points.

We are lapping two -- two seasons of tough business and tough comparisons.

So the comparisons get much easier.

The business in Spain has stabilized, so we're back now to starting to grow off of a lower base.

The business for those two seasons combined, are down for spring.

For fall 2009 and spring 2010, combined, the businesses were down somewhere in the high single digits.

And we're starting to see that trend reverse.

I think very similar to what happened in the US, as retailers have gone through tough business, they really come back to buy back into proven winners, like the Tommy business.

El Corte Ingles is our largest retail account in Europe.

We have a great relationship with them.

We perform exceedingly well at retail for them.

So we are gaining floor space.

We are gaining market share in that store.

So it's a combination of cycling some poorer business.

That whole business stabilizing us, stabilizing, and at the same time, us gaining market share in a tough economy, as some weaker competitive players fall off the landscape, gaining that business.

So it is a significant turnaround.

It's something that we were planning and hoping for and it's materializing as we go forward.

The Asian business, just to remind everyone, we operate directly, a Japanese business.

It was a business that was brought in-house about two and-a-half years ago from one of our licensing partners, and now we run it directly.

It's a business.

Japan in general, is an economy that's been tough.

It's a business that's very profitable for us.

The comps are tougher in that market, but our business in Asia, in Japan in particular, continues to be very profitable, and we continue to perform.

The other markets that we are in, we utilize the licensing model there, throughout all Southeast Asia.

We have a very healthy business in India, we have a very strong business throughout Southeast Asia, excluding China.

And we have a developing business in China, which is being done in a licensing arrangement today, which we announced that we will be taking back in house, the middle, sometime during the middle of next year.

I think it's June of next year, 2011 that we'll be bringing that business in house.

And we'll run it, either through a joint venture, or operate it directly as an operating unit.

We're in discussions right now to finalize that.

We think China should be a very strong growth area for Tommy, as you would imagine.

It's also -- it's an area where our Calvin Klein business is in excess of $200 million, and our Tommy business today is about $30 million.

Clearly, we see an opportunity there.

And we believe if we position ourselves we can really enjoy the growth of that market as we go forward.

Thank you.

Manny, just one other quick question.

Your marketing spend plans, contrast your plans for Europe versus the US.

Europe, the brand has a little bit different positioning today, or based on how it was historically established, in terms of the distribution.

Could you talk about the marketing spend differences between the two markets?

Or how the marketing dollars are utilized and what you might be leveraging back and forth across the two?

I think the additional marketing spend is being split between Europe and -- between international and the United States, about 50/50, the incremental spend and where we are seeing it.

I think the difference in the spend, is you'll see a lot more of the European spend at point of sale in the retail market.

We operate about 200 stores in Europe directly.

Having those flagships -- well I call them flag -- having those full priced stores in some of the best markets in the world, are some of our best marketing and communicating with our consumers on that level, some of the best way to communicate the brand.

Clearly, the positioning, internationally of the Tommy brand, and the consumer perception of the brand is higher outside the US than it is inside the US.

We've talked about the confusion over the last four or five years with the Tommy brand, as it's been stabilized the last three or four years.

And we've tried to be much more consistent in our presentation and our pricing and our distribution channels.

That has been much more consistent.

But there, I think in the US, what's clear, is we need to continue to invest in marketing.

We need to continue to keep the brand positioning consistent.

And we need to be true of what the brand Heritage is and I think clearly the previous management team has done that for the last two and-a-half years, and we will continue that as we go forward.

The only real change you'll see, is hopefully consistent increase in marketing spend.

And marketing spend will be tied in with our retail partners, particularly Macy's, We will be really working very closely with them, both on presentation at point of sale, and in marketing throughout the US markets.

So I think you'll see a step-up in it.

We're very excited about the new campaign, Meet the Hilfiger's.

I think you'll start to really see it in a more visible way.

I think it's really got off to a great start.

And I think you'll really start to see it third and fourth quarter, as we go forward with some exciting new marketing, that I think will lift the brand perception.

That's our goal is to move the brand perception as we go forward, particularly in the United States.

Thank you very much.

And we'll take our next question from Helena Tse from Bank of America Merrill Lynch.

Thanks.

You mentioned the share gains in your Heritage Wholesale business, IZOD and Van Heusen.

Is that increased floor space or increased store count, or a combination of both?

And who would you be taking share from?

Is that private label?

Well, the growth is coming from, principally square footage growth, with some of our largest retail customers, getting another program, another table, adding some new product categories.

A big initiative for IZOD is the bottoms business, and we've been adding that throughout the -- throughout our customer base.

We're seeing a roll-out of Van Heusen at Macy's over the last 12 months.

That will continue both in dress shirts and in sportswear.

And the IZOD business continues to expand its product categories with Belk's, and some of our other leading department stores.

So it's really -- it's less of a door expansion and more of a square footage growth within the door count.

And it's the retailers allowing us not necessarily to run as a collection business, but allowing us to pull together our IZOD positioning on the floor, taking our wovens, our knits, our sweaters and our bottoms business, and presenting them together as a pull-together classification businesses, where we really can get some intensity on the floor for the brand, coupled with our marketing and just improving our sales productivity at retail, principally our sales per square foot growth at retail with our major customers.

So that's where it's being driven from.

As far as the competition, look, I think value is winning and we're taking away some of the positions from some of the tertiary brands that were on the floor, that have been eliminated as a matrix.

Not necessarily going to get into it all, but the one that I think is public, and I won't be speaking out of turn, is clearly, Claiborne in department stores has taken its whole position and moved away, for a JC Penney focus there.

And between Van Heusen and IZOD, we haven't lost any floor space with those two brands, in fact, gained it at JC Penney.

So clearly, Claiborne moving out was a win for us overall in the department stores.

That's great.

And then two other questions.

One, I know that the US order books for spring are obviously subject to change, but can you comment on sort of your spring open to buy relative to, I guess, industry, and sort of how is inventory in the channel right now?

I guess I'll speak on inventory levels at retail.

I think the retailers -- we went through a series -- we went through nine months, starting in the third quarter of last year, where retailers were chasing inventory consistently, from the suppliers.

And because of the availability of production piece goods, you were really, in that time frame, you were able to react quicker.

There was production availability.

You were able to get it in.

You were able to do what was necessary, fly goods, do whatever.

There was transportation available.

That, as demand really started to dramatically improve in the fourth quarter of last year, coming into 2010, clearly production started to fill up.

You know all the stories about all the transportation issues.

We were very clear with our retail partners.

If you want goods, it's going to be very difficult to chase in the second half of 2010.

You're going to have to get the orders.

So the retailers were forced to really get ahead of the sales trend, and they're buying into whatever their planned sale comps trends are.

We're seeing that in our business.

And right now I would say to you inventories are in good position.

We're in excellent shape at retail.

The sales plans with our key customers seem to be running ahead.

Clearly inventory is in good shape, and they've bought into their, be it a, 2% or 4% comp store increase, depending whatever it is, the retailers have basically bought into that plan.

That's great.

And then one last quick question.

You guys mentioned sort of the fluctuation of the euro, and sort of the hit to the 2011 EPS accretion.

Can you talk about any accretion you might expect to achieve while increasing your debt paydown?

Sure, I think the best way to look at that is, our average borrowing rate on a term debt is about 5%.

So as we pay down, 200 or 400, or whatever the number is of debt, the savings will translate that.

So on $400 million of debt paydown this fiscal year, $100 million which is in the first -- which was in the second quarter, we'll probably have an interest expense savings somewhere in the $15 million to $18 million range next year.

That's great.

Thanks so much, guys.

And we'll take our next question from Howard Tubin from RBC Capital Markets.

Oh, thanks, guys.

Maybe just a related question.

In terms of uses for excess cash, will your first priority be to pay down debt, or should we expect any share repurchases going forward?

No, you should not expect any share repurchases.

We -- our net debt position net of cash is about $2 billion.

By the end of the year, I think that will be closer to something -- closer to $1.7 billion to $1.6 billion.

So clearly, our priority is to get our balance sheet under -- in control, take our debt -- make our debt paydowns, continue to take our position, as we go forward there.

That will be the driving force in our -- in the way we look at things.

Okay.

Operator, I think it's now 10 after 11.

I think we're going to close the conference call.

So I'd like to thank everybody for the time that they've -- for their time this morning.

We look forward to speaking to you, with our third quarter press release, which will be in early December.

Obviously, if you have any questions or clarifications, please reach out to Pam and Mike, and they'll try to help you through it.

And everyone have a great day.

Take care.

Thank you.

Once again, ladies and gentlemen, that does conclude today's call.

We appreciate your participation.