PVH Corp (PVH) 2010 Q4 法說會逐字稿

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At this time, I am pleased to turn the conference over to Mr.

Emanuel Chirico.

Please go ahead, sir.

Thank you very much.

Good morning, everyone.

Welcome to our call.

Joining me on the call is Mike Shaffer, our CFO; Allen Sirkin, our President; and Ken Duane, our Vice Chairman in charge of all our wholesale businesses in the Company.

Also, on the call is Pam Hootkin who I think you all know is retiring, and this will be her last official conference call with us.

So we will definitely miss Pam as we go forward, and there are some big shoes to fill.

And Pam's replacement, our new Treasurer and Senior Vice President of Development and Investor Relationship, [Dana Perlman], is joining us on the call as well.

Let me start the call by saying how excited we are with our results, how pleased we are with those results, and I would like to just jump right into the business review.

Let me start with our Calvin Klein businesses.

We had a very strong quarter at Calvin Klein.

Our momentum continued there through the fourth quarter.

Total revenues for the Calvin Klein combined businesses were up about 18% in the quarter, and our operating profits increased over 27% in the quarter.

Focusing in on these Calvin Klein apparel businesses that we operate directly, we recorded a sales increase of about 22% in the quarter.

This strong performance was fueled by our men's wholesale sportswear businesses, as well as strong performance in our own retail stores.

Our Calvin Klein retail businesses posted a 10% comp store increase in the quarter.

That strong trend has continued into the first quarter of 2011 with comp stores posting over a 10% increase through the last week of March.

In our licensing segment, royalty revenues were up about 11% for the quarter, and let me put some color on some of our biggest businesses.

I will start with fragrance.

Our Coty fragrance business had a strong quarter, posting a 10% increase in revenues.

Business was very strong across the board in all geographic areas.

We had very strong performance with Euphoria and CK One fragrance having particularly strong sell-throughs at retail.

The quarter also benefited from the launch of Calvin Klein Beauty.

The Calvin Klein Beauty business was particularly strong throughout Europe and South America.

Moving to our US-based women apparel business, there we also posted strong revenue growth.

Our G-III partner and licensing partner was up over 30% in the quarter.

The growth is being driven by strong selling of women's sportswear and dresses, as well as good performance in the outerwear category for the quarter.

Our watch and jewelry business saw significant growth in the quarter, posting a 40% increase over last year's fourth quarter.

The growth was driven by door expansion and significant comp door sales growth in the US, Asia and Europe.

Our CK Bridge business in Asia continues to grow dramatically, posting an over 50% increase in revenues for the quarter.

The growth is being driven by China, Hong Kong and the Korean markets where we are experiencing a significant door expansion and double-digit comps store sales growth.

Moving to underwear with Warnaco, the Calvin Klein underwear business for the quarter was ahead about 8% with all regions -- Europe, Asia and the Americas -- posting strong sales growth.

The growth was being driven by continued growth of the international retail square footage and the extremely strong performance of men's.

Men's Calvin Klein X continues to drive performance, and the addition of X Elements has given us an added sales boost.

In women's the introduction of Envy has been well received with Europe and Asia posting the strongest results.

We believe this is an important step in continuing our momentum into 2011 and beyond as we really start to focus on a younger consumer with the launch of CK One.

In our jeans business, our jeans business across the board was up 11% for the quarter.

We saw strong growth in Latin America, Asia and in the US.

We have a major launch going on in the first quarter of 2011.

We are constantly looking for impactful launches at Calvin Klein.

Historically these launches have driven sales and created significant marketing and PR buzz for the brand, starting with the launch of Euphoria in 2006, Steel in 2008, followed by X in 2010, and that trend will continue.

Spring 2011 will mark the introduction of CK One, a dual-gender multiproduct category launch.

The launch will focus on our largest product category area -- fragrance, jeans and underwear.

Given the high awareness of CK One due to the success we have enjoyed in fragrance, we are very enthusiastic about the potential that CK One brings to jeans and underwear.

The launch will be supported by a major cohesive marketing campaign that will combine our fragrance, jeans and underwear category.

The campaign and the product offering are targeting a younger consumer demographic.

CK One represents the largest introduction in our history and is expected to represent about 10% of our annual underwear business.

Initial orders have been very strong, and more importantly, sell-throughs at retail have been very good across the board in Europe, Asia and the Americas.

I'm going to move on to our Heritage businesses.

Our Heritage businesses had a very strong quarter.

Sales increased for the quarter about 10%, and operating income was up 20% for the quarter.

At our Heritage retail businesses, fourth-quarter sales posted a 2% increase.

Our comp sales trend has continued to be running on plan for 2011.

It is running about minus 1.5%, which is being impacted by the negative Easter calendar shift in March.

Sales at our wholesale businesses in the fourth quarter grew 17%.

Our dress furnishing businesses posted a healthy 7% increase, while sportswear posted an increase of over 25%.

We saw significant growth in our IZOD, Van Heusen, Arrow and Timberland sportswear businesses.

Our wholesale businesses continue to outperform the competition at retail and are clearly gaining marketshare in department stores.

We believe this growth is being driven by one, delivering great product at a great value proposition to our consumers, and two, our consistent IZOD and Van Heusen marketing spending over the last four years, which we believe is clearly paying dividends for us with our consumers.

Moving to Tommy Hilfiger, let me start by saying our integration plan is running; it is on target.

We are on target to deliver our cost savings for 2011, and we should be complete with the integration of the North American system platform by May of 2011.

From a marketing brand building perspective, we had some key milestones in the holiday season.

First, we launched our holiday marketing campaign centered around Meet the Hilfiger.

We could not be happier with the execution of the campaign in print, outdoor and on television both in the US and globally.

The response from the consumer and our retail customer account has been extremely positive.

Second, we opened a 12,000 square feet store in Paris.

We opened a flagship store on the Champs Elysees, and are very happy with the way the execution of that store has come out and the related market reception to it.

France is a major growth market for us, and we believe the flagship store will solidify our position in the market and help us to drive future growth.

Moving to the fourth-quarter business results, overall the Tommy brand had a very strong quarter.

We exceeded our revenue guidance by about $20 million, and our operating earnings came in ahead of guidance, despite spending an additional $5 million in the quarter focused on European marketing.

That was not planned for the quarter, and we were able to cover that and still deliver our earnings.

The brand's performance in both Europe and North America has been particularly strong.

The European wholesale business posted a very strong fourth quarter.

We saw sales growth of over 10% over the prior year in the wholesale business.

On a product category basis, we are seeing double-digit growth in menswear, denim, bodywear and footwear.

From a geographic perspective, our strongest growth markets were the UK, Germany and France.

In fall, given the difficult economic conditions in Spain and Ireland, these are the only two countries posting a low single-digit negative sales trend.

As we look to spring 2011, the momentum continues and is actually accelerating.

Spring sales are running ahead about 12%.

We are seeing strength in all product categories.

All of our European countries are experiencing growth with the biggest turnaround occurring in Spain where spring sales are up about 10%.

Our key growth markets, France, the UK, Italy and Russia, are all seeing spring order growth of over 20%.

We are also seeing growth in orders for fall 2011.

Our fall order book is running up over 15%.

We are seeing strong double-digit sales growth in most countries.

By product category, the strongest areas are coming from footwear, bodywear, men's sportswear and women's sportswear.

Moving to our European retail business, sales were very strong in the fourth quarter with comp stores exceeding 10%.

That trend has continued very strongly into March with comps up in the high single digit area, despite the Easter sales shift.

In our North American retail business, we posted strong comps in the fourth quarter, which were over 10%, and that sales trend of plus 10% has continued into the first quarter of 2011.

We are seeing strength in all regions of the country with particularly strong performance in geographic areas that cater to international tourists.

The Tommy retail results are very consistent with the strong sales performance we are seeing in our Calvin Klein retail business in the United States.

At our US wholesale business, our Macy's business continued to see good performance in both men's and women's.

Sales ran ahead of last year, and sell-throughs at retail were on plan.

So the Macy's business is running on plan right now.

I would like to focus now on Japan to give you an update on where we are.

We have over 1000 associates in Japan, and I am very happy to report and very importantly to report that all our associates are safe and that their families are safe.

We operate two businesses in Japan.

We have a Calvin Klein business that is a licensing division in Japan, and in order to be prudent for 2011, we are planning this business at contractual minimum royalty levels, which results in our projecting the CK Japan business down about $4 million from 2010 levels.

That is included in our earnings projections for the year.

Our second business is a larger business, and it is a Tommy Hilfiger retail business in Japan.

We operate about 185 stores and shop-in-shops throughout Japan.

177 of these locations are opening -- are open with about half operating with curtailed store hours due to power outages throughout the country.

Four of our stores experienced moderate damage and should open in the next two to three weeks, and four of our stores in the earthquake area were heavily damaged and will remain closed for an extended period of time.

To put the Japan business into perspective, in 2010 on an annual basis, our Japan Tommy business had revenues of about $230 million with operating income of about $20 million.

For our earnings projections, we are planning earnings down for the year about 25% or $5 million.

In total, Japan is negatively impacting our 2011 earnings projection comparisons compared to 2010 by about $0.08 to $0.10 per share.

Finally, just to put the entirety of the Japan business into perspective, from a revenue point of view, Japan represents about 4% of our total consolidated revenues and about 5% of our consolidated earnings before interest and taxes.

Lastly, I would just like to touch on our guidance for 2011.

As I think you all know, 2011 is a chaotic market, truly being driven by the sourcing cost increases that all of our industry is experiencing starting in the first half at about 5% to 6% and moving into second half of the year where we are seeing cost increases in the neighborhood of 15% to 20%.

We have tried to be very prudent with our estimates.

Given the positive forecasting that we have been able to do on our effective tax rate, we really feel we have put together operating margins and sales guidance that not only we can meet, but if things break in a proper way that we can actually exceed as we go forward.

We have tried to be as prudent as possible with the guidance and tried to give ourselves room to outperform the guidance that is there.

So, with that, I'm going to turn it over to Mike to try and give you some color and quantify some of these results.

Thanks, Manny.

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

For the fourth quarter, we delivered revenues and earnings above our guidance and significantly greater than the prior year.

Our revenues for the quarter were $1,398,000,000, a $784 million increase over the prior year and about $25 million greater than our previous revenue guidance.

Driving the increase in revenues to last year was Tommy Hilfiger at $700 million and a 13% increase in our Calvin Klein and Heritage businesses.

Versus our previous guidance, all businesses performed above plan with Tommy Hilfiger revenue approximately $20 million greater than planned, and the Calvin Klein and Heritage businesses $7 million greater than planned.

Operating income for the quarter was $129 million, a $68 million increase to the prior year.

Driving the increase over last year was our Tommy Hilfiger business, which delivered $56 million of operating income combined with an increase in our Calvin Klein and Heritage businesses of $18 million or 25%.

Impacting the quarter comparisons to last year and plan was an increase in incentive-related compensation of about $6 million as a result of our significant earnings-per-share increase over the prior year, which was in part driven by our tax adjustment which I will discuss in a minute.

We delivered earnings per share of $0.93 for the fourth quarter, which was $0.11 greater than our guidance of $0.82.

Our earnings per share beat breaks down as a $0.01 beat in Tommy Hilfiger, a $0.03 beat in our Heritage and CK businesses offset by a $0.06 corporate charge in incentive compensation, which primarily relates to the favorable tax expense.

We also picked up $0.01 in interest expense and $0.12 in taxes for a total of $0.11 beat versus our guidance.

Moving to taxes, in the fourth quarter, we completed the Tommy Hilfiger US federal tax return for the pre-acquisition period.

In conjunction with that filing, we finalized the transfer of certain brand intangibles to our European subsidiary.

The effect of the transfer was to reduce our effective tax rate for the year to 31.9% from our previous guidance of 36.5% to 37%.

The impact to the year was approximately $0.31 per share.

For the fourth quarter, the impact of the tax change was $0.12.

As noted in our press release, we have revised our previous quarters to reflect the tax change.

For the year, our earnings-per-share was $4.26 and reflects the effects of the tax change, as well as the favorable fourth-quarter results I described.

We expect this favorable tax benefit to continue indefinitely into the future and would expect our effective tax rate to continue to decline over the next few years as our international income is expected to grow faster than our US-based income.

Moving to our guidance for the year, our revenues are planned at $5,580,000,000 to $5,655,000,000 or an increase of 20% to 22% over the prior year.

Tommy Hilfiger revenues are planned at $2.8 billion to $2.85 billion as compared to the nine months in 2010 at $1.95 billion.

Calvin Klein royalties are planned to increase 7% to 8%, and combined sales for our Heritage and Calvin Klein businesses are planned to increase 3% to 4%.

As a result of gross margin pressures due to increased product costs, we've planned our overall operating margins in 2011 at 11% to 11.5% versus the prior year's 11.8%.

We are planning our Tommy Hilfiger and Calvin Klein operating margins relatively flat to the prior year.

Our Heritage margins are planned down 100 to 200 basis points at 8% to 9%.

Our consolidated gross margins for the year are planned down about 150 to 200 basis points, reflecting the impact of the increased product costs.

Our expenses will be down 100 to 150 basis points, reflecting expense reductions and SG&A leverage.

Interest for the year is planned at $134 million to $136 million and reflects the benefits of the repricing we completed in February, offset by planned costs associated with converting our variable debt to fixed debt.

Our tax rate for the year is planned at 29% to 31% and reflects the Tommy Hilfiger business for a full year, as well as the benefits of the intangible transfer we previously discussed.

For the first quarter, we are planning our revenues at $1.32 billion to $1.35 billion.

Tommy Hilfiger is planned at $675 million to $700 million for the quarter.

Our Calvin Klein licensing revenues are planned at 6% to 7% with total revenues for Calvin Klein and Heritage businesses planned to increase about 4%.

Earnings-per-share for the first quarter is planned at $1.14 to $1.16.

Reflected in our earnings guidance is $8 million of additional advertising in the first quarter, primarily related to the Calvin Klein's CK One campaign.

Operating margins are planned down in the Heritage and Calvin Klein businesses about 150 to 180 basis points and reflects about 120 basis points of impact from the additional advertising.

Tommy Hilfiger operating margins are planned at 11.5% for the first quarter, and their overall operating margins will be about 12%.

Our tax rate for the quarter is planned at 32.5% to 33.5%.

On the balance sheet, we are planning to pay down $450 million of debt this year.

$150 million was paid in March in conjunction with the repricing of our debt.

Our inventories reflect the growing trend of longer lead times to take advantage of cycle production and opportunities to reduce product costs.

We believe this trend will continue for the year and maybe beyond.

Our inventories in the channels and in our stores are very clean, on plan, and we have no inventory problems or obsolete products.

Lastly, on Japan we have reflected the reduction Manny described for our Tommy and Calvin businesses, which totaled in excess of 25% of the EBIT.

We continue to monitor the developments in Japan, but have reflected reduced forecasts for the balance of the year.

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

(Operator Instructions).

Bob Drbul, Barclays Capital.

This is [John Conner] in for Bob today.

Just a question on the drivers of Tommy profitability.

Can you get into that a little bit more and how you were able to offset the extra marketing expense during the quarter?

Sure.

I think it was really two things.

We had about $20 million of additional revenues for the quarter against our planned, and also, our gross margins rate was about 50 basis points higher than we initially projected.

That more than offset the $5 million of spend that we had in January for the brand.

So the combination -- and geographically I think if you look at it, I would say about a third of that revenue beat came out of North America, and two-thirds of it came out of Europe on an overall basis.

So we were very happy with the performance overall.

Okay.

And so you are projecting it flat for 2011.

But let's say going forward beyond that into 2012, do you think there is still some more upside there, or is that marketing expense -- the additional marketing expense that's when you think that is permanent or ongoing?

Okay.

I guess just so we are clear, we are planning the operating margins flat with approximately a revenue growth somewhere in the neighborhood of 40% plus given the quarterly -- given the first quarter add.

So our operating revenues for the Tommy business will be up somewhere in the neighborhood of $100 million.

So just to keep it in perspective, our operating margins at Tommy are being planned at 10.5%.

We think that is a prudent way to go given the kind of cost increases that we are seeing across the board.

Now, in our Tommy businesses, the cost increases are probably in the area of 13% to 15% given the more expensive product at Tommy, and we are assuming some level of price increases to offset that but we are trying to be cautious on that.

And looking at it all-in, the operating margins of 10.5%, we think, are reasonable.

Going forward, all things being equal, we would expect with the type of growth that we see going forward that we will be able to grow the business topline in the high single digit range, and bottom line we should be able to expand the operating margins 100 basis points a year given that kind of growth, which would translate into something closer to 15% to 20% operating income growth for the Tommy business that we see going forward.

David Glick, Buckingham Research Group.

Good morning and congrats on the quarter.

Mike, just looking at your guidance, your assumptions on the low and high end imply a wider range than your EPS guidance of $4.70 to $4.95.

Can you walk us through how you get to that range and which of the assumptions you feel are more conservative than others?

And then, Manny, if you can touch on the pricing environment and how you see the gross margin unfolding as the year goes on and your ability to get pricing in the first half versus the second half?

Okay.

I guess, David, just to make sure I understand the question, let me answer it, and if you don't get it, you will come back.

If you use all the low-end assumptions in our press release and in our guidance, you will get something lower than our guidance.

If you use all of the top-end guidance, you will get something higher than the top-end of our guidance.

The guidance we gave is not all low or all high.

It has to be mixed and matched.

We feel there is opportunity in the Calvin and the Tommy businesses.

We feel that is where the opportunities would be for next year.

There is a variance on the tax rate of about 2 points, and if you pick the lowest or the highest, you would probably have a profit -- we would never be at the low end or the high end unless we hit the extremes.

So you have to use something more towards the middle.

So it's not meant to be picking all low or all high.

I guess, David, I would just jump in is, before I talk about the sourcing, is, I guess, when we look at the opportunities for next year and you take your range of estimates that you have there and then you apply your adjustment to it, we see opportunity -- clearly from a topline point of view, we see continued opportunity in Calvin and Tommy as Mike mentioned.

But I think we also see opportunity on the margin line, particularly on the gross margin line.

If our strategies play out the way we would like to see them play out from a positioning point of view on the floor, how we feel we would be positioned against the competition, our financial projections assume a more conservative, out-the-door AUR than we are projecting in our sales ladders with our department store counts and our sales ladders in our own retail stores.

So we clearly are giving ourselves some room to try and be sensitive to how the US and the international consumer react to particularly the fall price increases that are going to be on the floor in 2000 and -- in the fall season.

The other issue that presents itself is, how do you plan your unit growth when you're also dealing with a retail sales growth?

And we have tried to be prudent there.

We have taken units down across the board and given ourselves a chance to chase some of that business, particularly on the core side of the business.

We have also built into the plans as we go forward some level of sales cancellations given the environment.

If those things don't materialize, clearly we would have upside on the top line as well, which would drive profitability as we go forward.

So we clearly believe we have positioned ourselves depending on what happens in the market to deliver the results and hopefully exceed those results.

The initial reaction to the sales increases -- we tried to react very quickly on the floor and for spring get a fair amount of the price increases, particularly in the United States on the floor.

So we have raised our MSRPs in spring 8% to 10%, and we are seeing -- it is very early and it is very hard to read the business -- given the early Easter, the amount of clearance that is on the floor, private label in particular, but we are transacting in the first two months of the year at a higher AUR for our spring goods than is in our financial plan.

Does that hold itself as we go forward?

That is the big question.

As we move into the Easter selling season, will it become a more promotional environment?

I can't tell you right now.

We will have a better picture of that when we report first quarter at the end of May.

So that's a broad stroke, strokes as we see it.

We have tried to give ourselves the opportunity to outperform some of this guidance.

I'm seeing a lot more percent off signing on the floor in department stores.

Is that kind of the strategy, is raise the MSRP and more a focus on 30%-off, 40%-off type promotions?

Look, I have the same general reaction that you have.

So I'm seeing the same kind of percentages off at higher MSRPs, and what that is doing in our business I can speak to it with authority is what that is doing, is it is driving a higher out-the-door retail.

Now I don't know if that is across the board, but I know in our sportswear businesses and our dress furnishing businesses in the United States, that we are clearly seeing that now.

But it is -- we are really six, seven weeks into the season, and I don't want to get too far ahead of ourselves.

And lastly and then I will let others ask questions, the UK business we have been certainly reading that the UK retail environment is getting more difficult.

Are you seeing that in your current retail business and in your order book?

No, it is just the opposite.

We are seeing big double-digit increases.

Now in fairness we also have an underdeveloped UK business compared to the size of the market, which we view as a tremendous growth opportunity over the next three to four years.

The UK business round numbers is about a $50 million market for us, and that would compare to Germany that is well over EUR50 million, and that would compare to Germany, which is well over EUR300 million.

There is no reason why the UK business should not be approaching the size of the German market.

So, again, that is our opportunity, and we are seeing over 20% growth in that market.

So we are feeling good about how we are performing there.

Kate McShane, Citi.

Can you tell us what is included in your guidance for the launch of Arrow and IZOD in the back half of the year, and also how much in synergies we are seeing from Tommy that is contributing to the bottom line in 2011?

Sure.

Let me start with the -- we are not launching IZOD for 2011.

IZOD may be a 2012 initiative.

We have not finalized that decision.

We are launching Arrow.

We have seen nice reception, but it is totally immaterial, and it actually has a startup loss as you would expect given the marketing investment and the people investment as we go forward.

So I think we are planning somewhere for the back half of the year of EUR10 million to EUR15 million business with a small operating loss for the year.

So that is all in our numbers as we go forward.

And I guess the -- what was the other question?

The synergies.

Oh, Mike will talk about the synergies.

On the synergies, we had talked about getting about $5 million of synergies last year and we did.

This year we are looking at about $20 million of synergies, and we are on track.

The plans we have we are slightly ahead of, so we will get the $40 million that we had talked about at the end of the three years, and we are on track to deliver that.

Okay.

Thank you.

And then with the Heritage business, it sounds as if it has slowed slightly.

I just wondered if you could give a little bit more detail about traffic you are seeing at the outlets and average ticket.

Well, I think it is right on plan.

Our fourth-quarter comp trend in Heritage was about plus 2%, and we are now running minus 1.5%.

But you have to remember that Easter is four weeks later.

The last two weeks have been big negative weeks given the Easter calendar shift.

So I think prior to those weeks we were running about plus 2% to 3%.

So I think we are right where we are supposed to be from a first-quarter point of view in our retail business.

Traffic is off.

Conversion is up.

AUR is higher.

I would not read too much into the traffic yet because I think a lot of that is being driven by the fact that Easter is later, vacations are later, and spring break vacations are a little bit later, and we have not cycled those all.

So I think it will be a much more meaningful statistic at the end of April.

So we are not at all concerned about the Heritage businesses.

Margins are good there, inventory is in a great position, and no concerns about the retail businesses there.

Okay.

Thank you.

And my last question has somewhat been asked.

I'm just asking it in a different way.

I know you're not passing all of the cost increase through in the back half of the year, but how are you addressing the different products categories that you sell in terms of pricing?

Very carefully.

I think when you think about it we have tried to -- what we have really attempted to do on the floor is in our fashion product on the sportswear side of the floor is we feel there we have more opportunity to raise price points as opposed to some of our core more basic product.

When you look at the fashion product, I think you will see our fashion product on average is up -- our MSRPs and our planned AURs will be up over 20% for the fall holiday.

And when you get to more of our core basic product, I think you will probably see that more in the 6% to 8% range cost increases.

And I think it is that combination, having a sensitivity to the consumer, I think having the levers to pull, the one advantage that the high/low pricing strategy does afford us is the ability to react in season.

So we don't have to mark the goods exactly the way we think it is going to be going out the door.

So if we go out with the higher MSRPs, if the consumer is reacting to those goods, we don't have to hit the point of sale markdown as hard.

But if we see any kind of softness, we can hit the promotions harder and try to drive the business through a percentage (inaudible).

So I think it gives us our best opportunity to maximize the retail.

Given our system capabilities, the analyst sales team that we have in place, our coordinator program that is in the stores, we are able to really react within days of what is happening at wholesale, and at retail we are able to react in our own stores immediately the next day.

So our systems are that sophisticated that it allows us to do it.

Adrianne Shapira, Goldman Sachs.

Manny, congratulations.

Just maybe following up, if I understood your comments on the spring, it sounds like MSRP up 8% to 10% in the spring.

I understand costs up only 5%.

Maybe help us walk through what that means for gross margin opportunity in the first half.

Is that being baked into your estimates, and are we assuming first half better than the second half when you talked about that 150 to 200 basis point contraction for the year?

Given the fact that if you walk the retail floor today, I think very few vendors or very few brands have moved their MSRP significantly.

So competitively on the floor we have moved Calvin, we have moved Tommy, we have moved our Heritage brands, and we have moved the MSRPs.

I think some other players have followed, but I think we have reacted very quickly.

But given that dynamic from a financial projection point of view and given the fact that the floor has not really changed, we have not assumed any significant improvement in the AUR for the spring season.

So now the fact that the MSRPs are higher, that the first six weeks of the selling season, we are transacting at a higher AUR for our spring goods, makes us feel good about what is going on, but we need to see more before we will get ahead of those numbers.

So there is an opportunity in the first half to capture some additional gross margin rate and dollars, but we will see how that plays out as we go forward.

In the spring -- in the fall, we have baked in that we are attempting to pass on depending on the category.

In Tommy and in Calvin, we are looking to pass on 70% to 80% of the price increases.

And in Heritage, we are looking to pass on 50% to 60% of the price increases -- cost increases through on AUR.

That is what is built into the models.

Okay.

Makes sense.

That is helpful.

And then you talk about opportunities where or the way you deemed guidance is deliverable and maybe even beatable, but maybe help us think about a lot of fear out there, a lot of uncertainty, what the consumer is willing to bear.

What if things don't turn out as you would expect?

Where there is room, some flexibility, some cushion that if passing these on gets more challenging, how you can -- what is the Plan B to be able to deliver these numbers?

I guess there's two areas.

I think we have given ourselves room in the gross margin and in the average unit retail that we are planning based against the ladders and sales ladders that we have built for wholesale and retail.

We have given ourselves room to miss plan and still deliver our gross margin.

Secondarily, there are some areas in discretionary spending we are planning advertising for the year.

Given that Tommy is being now included for the first quarter -- it was out last year -- advertising expense for the year is up about $30 million included in these projections.

There is room of between $10 million to $12 million of that discretionary spend that we could pull back on and still have reached our consumers in an effective way if the reality of the situation is the consumer is not willing to step up and pay additionally for the goods that are on the floor.

So we have tried to manage it giving ourselves some room on the operating expense line and also giving ourselves some room on the gross margin line from a percentage point of view.

I think if the trends in the business continue, the trends of the business were to continue in our US-based businesses and our European Tommy businesses, that clearly there is sales upside against this guidance.

But again, we are factoring in some level of cancellation against the order books that we have.

And if those don't materialize, we have tried to give ourselves some room.

So we have tried to put together a very prudent plan.

We have tried to give ourselves rooms and a couple of levers that we can still deliver the guidance and deal with a very tight environment.

If the environment were to be a little less tight, I think we could -- clearly we would deliver this and we would exceed this guidance.

Great.

And then not so long ago, everyone was intently focused on the euro translation, what it meant for your earnings.

Maybe what you factored in for the euro into your guidance?

Mike?

Our euro guidance is about -- for the year, we are looking at about [135 to 137].

Okay.

So below current rate?

Yes.

The current rates have only jumped in the last two and a half weeks, but right now 135 to 137.

Okay.

And then, Manny, just lastly on the inventory front, it sounds like you are being prudent even if you're planning down and you're looking to chase business.

It looks, though, when you look at the inventory year over year, some pretty big increases.

So maybe walk us through and give us comfort that we have got a clean inventory situation and maybe any sort of granularity in terms of where you're placing the bets across brands and divisions.

Thanks.

Sure.

I think there's two things going on.

I think on core replenishment businesses we are being a little bit more aggressive on our inventories and taking very little risk from a markdown perspective so that we are in a position to outperform our sales plan and chase the business.

So white dress shirts, blue dress shirts, the core businesses that drive 50%, 60% of the dress shirt business to really, we are behind those.

We got behind those inventories and really trying to maximize the sales on the floor to gain market share.

On the other businesses in our sportswear areas, what is going on in the industry, and I think you are going to see it across the board is the lead times for all practical purposes are up about 45 days.

And we are trying to capture better costing on some goods, and we have made the decision to bring in some of our goods earlier to the tune of 45 days.

And what that is causing, it is probably causing a 5% to 10% increase in our inventory for the -- and that will continue through the first three quarters of the year.

By year-end it will level itself out because we will start to anniversary that.

But given the sourcing dynamic that is out there today, the limitation on production, the ability to try and reduce costs, we have moved in -- we have done some sourcing realignment, gotten in a stronger -- we have gotten in a larger position in some developing countries that we have good networks there.

But the lead times in those developing countries are much more -- are anywhere from 60 days longer to what they might be in, say, China.

So, in those markets where we can get a cost advantage, we have made the determination that it is appropriate to bring those goods in earlier.

And that is what Mike was talking about in his opening comments that it probably represents about 20% of the increase on the inventory that you are seeing -- that you're seeing in the inventory.

So that is how we are planning it.

I don't think it at all expose us to a markdown risk.

It is a carrying issue, and it will be --- it's built into our interest expense as we go forward.

Thank you.

And I just wanted to send my congratulations to Pam.

Best of luck.

We will miss you.

Thank you.

Robbie Ohmes, Bank of America/Merrill Lynch.

Pam, I want to extend mine as well.

You will be missed.

Thank you very much.

Robbie, she is crying now.

You happy?

I just had a follow-up question on sourcing.

The question is, Manny, given the challenges that you have talked about, I would think that you guys handle them better than most other people.

Are there situations where you think the sourcing issue is creating some market share opportunities for you in any of your brands, especially maybe either versus private label or anybody else out there?

And also related to that, can you just remind us what the plan is -- I think Tommy Hilfiger was mostly with [Lee & Fundus].

Is there an opportunity to improve the cost of the Tommy Hilfiger business over the next several years as you bring some of that in-house?

Okay.

Let me take the last part first because that is the easy part.

We have no plans to move the sourcing from -- the mechanism that is in place at Tommy that delivers such a high level of profitability.

So that is -- the plan is to stay in place.

It works for that business.

We are not looking to save --- look to save pennies in order to put anything at risk.

That management team has that well in hand.

If there's opportunities, we will work together potentially on the dress shirt area.

We have talked about maybe doing something in that area, but for the most part, there is no plan to change any of the sourcing.

Robbie, I think your first part of the question is an excellent question.

There is -- I think there's a couple of things that are going to happen this year.

I think first and foremost is we are going to see competition, potentially some of the smaller players, default on deliveries.

I think it's -- in this sourcing environment I have heard a lot of people now that we are moving --- are moving to low-cost production areas, they are moving to Bangladesh, Pakistan, Egypt, and they have never been there before.

I can assure everyone that sourcing goods in Bangladesh, Pakistan, Egypt, just to pick a couple of the countries, is not the same as shipping goods out of Hong Kong.

So I think that late deliveries are going to be a major issue for the fall selling season, and just defaulting on deliveries will be an issue, and those always portend well from a marketshare point of view.

Secondarily I think it's when -- when business gets tough, I think the larger players with the scale are the winners in that.

The better operators tend to win and are logistically able to really outperform the market.

And I think that gives us a big opportunity in the second half of the year as we go forward, particularly in those market areas where we are dominant like in the dress furnishings areas and in the opening price points in the moderate sportswear areas in classification and department stores.

So clearly I think that is an opportunity, and I think retailers are by no way de-emphasizing private-label.

That's not what I'm about to say, but I think there are some pockets where they have made a decision that it is better for the branded experts to play in those categories, and I think in the fourth quarter in particular, we are picking up some holiday orders away from some private-label categories.

So I think all of that is a marketshare win as we go forward, and always a chaotic environment, I think, plays to the strength of the big players like ourselves.

Jeff Klinefelter, Piper Jaffray.

Thank you and also, Pam, congratulations and good luck with the next stage.

Manny, I just wanted to ask you a couple more questions about Japan.

In terms of your ability to forecast given the significant uncertainties in that marketplace, can you walk us through how you attempted to forecast the change in business this year and what to expect as we move forward in terms of monitoring that situation from your business standpoint?

Sure.

Look, I think on the Calvin side of the business, just to put it -- I don't want to say we reach for the bottom, but given the $4 million swing, we just decided that was prudent to do.

We don't actively manage those individual businesses.

We actively manage the brand, but not the businesses.

On the Tommy side of the business, we have management in place locally.

Our head office there is over 100 people managing the business day to day from a sourcing point of view, from a logistics point of view, and from a sales point of view.

The trends, as you would expect, are starting to -- the first week we were down 60%, 70%.

The next week we were down 40%, and then last week the business was down 25% -- 25% to 30%.

So clearly we are starting to see the business start to come back.

I think if the -- there is a lot of uncertainty out there, and at this point in time, we made our best estimate into consultation with the local management in Japan.

Again, I don't think it is any means the worst-case scenario, but it's a very reasonable scenario built up, and it assumes over the next four to six months that business will start to get back to some level of normalcy, even if we don't reach the sales levels of the prior year, that we would be within striking distance of 5% to 10% of that.

So I think that is how it has been built.

We will continue to monitor the situation.

It is too soon to make any major calls, but I just remind you again it only represents about 5% of our consolidated EBIT.

Okay.

Thank you.

And then secondly would be on Europe.

Some great increases that you are seeing in the Tommy business now for spring, and as you also already noted on the UK, they are probably taking some significant share off of your current base of business.

But maybe using Spain as an example and others where you are seeing those double-digit increases and a turnaround in the business pointing to anything in particular?

Gaining some new distribution?

Is it same-store sales gains new doors that you are opening?

Maybe just a little bit more color around that.

I think you have to say, in the mature markets that we have had -- that we really have a very significant position in like a Spain and a Germany, I think there it is not new doors per se, but it's an increase within those doors, an increase in square footage.

It is some new categories.

The footwear business continue -- the footwear and accessory business, both of which are still relatively new, continue to grow significantly as we go forward as does the bodywear and the underwear business that we are in.

Those businesses continue to give us strong growth as we go forward.

So that is more in the mature markets.

In our growth markets, which we have identified particularly focused on which is Russia and the Middle East, which is Italy, France and the UK, clearly there it is a combination of new doors, a combination of comp store expansion as well, and it is category growth across the board.

So there it is really the brand just growing into what the market potential is for the brand in those markets and benefiting as we open regular price stores, as we open -- we talked about the flagship in France.

Clearly we have regular retail throughout the UK that we are really positioned very well there, and the brand just keeps gaining strength in Italy where we have a very nice regular retail business.

We continue to gain with more and more specialty doors there.

So overall it is more of that kind of continuous, very thoughtful growth.

And with the other thing -- in the second half, just the sheer math the way it works is our AUR -- our selling price into our wholesale accounts is probably up about 8%, and our units are up year over year.

So when you put that combination together, you drive the 15% growth overall.

So I think from a sales topline point of view, the higher costs, which are driving higher selling prices to our wholesale account, is really benefiting that business.

Great.

And just lastly, you have hit on it already with the pricing, but I was going to ask you to compare and contrast your price increases in Asia and Europe relative to the US.

It sounds like as a starting point they are all in that 8% to 10% increase range.

I believe pricing has been less sensitive in Europe and Asia for most brands.

So maybe you could just touch on that lastly.

Yes, I think how I would say it is, in the European market, in particular, they don't have what we have, which is the balancing up and down in retail prices at point of sale.

So you set your -- you need to set your MSRP and not your selling price in season, and as you go through the season as you get to our clearance point of view, you will start to take permanent markdowns as opposed to what we do in the United States where you have weak sales, and you'll go 50% off, you will go 25% off, you will go 30% off, and you will bounce back and forth.

In most markets throughout Europe, that is not even -- it is against the law to actually to do it.

So obviously you need to make an earlier call on retail selling prices, and the judgment of the local management was, as we are dealing with these market dynamics, is to raise prices about 8%, both ticket and selling prices in.

So, again, we will see how that is.

In the US we have assumed for the fall season about a 7% to 8% increase in AUR, but the MSRP is up closer to 15% to 20%.

So we will manage how that really plays itself out as we go forward and see if there is more opportunity and what kind of elasticity.

I think for spring 2012, as we really start to look out to the fourth quarter and beyond, there is clearly an opportunity in Europe if things hold the way they are to raise our prices once again given the market dynamic that is going on in sourcing.

I hope that answers (inaudible).

Howard Tubin, RBC Capital Markets.

Manny, just when looking at the Tommy business in the US, what opportunities do you see there maybe near-term both within Macy's and outside of Macy's?

Okay.

I guess -- on the wholesale side of the business, we really look at that business in our goal, not our financial projection, but our goal is to double our footprint at Macy's.

So you take a business that is doing round numbers $275 million in sales directly from -- not including the license sales but directly -- our goal is to get that over $500 million over the next four to five years.

As we grow in, we think we should have a larger position in women's; we should have a larger position in men's; we should have an accessory business that is much larger than it is today and it gives us the opportunity to grow those footwear categories across the floor.

We don't necessarily have a meaningful kids business on the floor.

That is a license business, and we think that should be a much larger business at Macy's, and those are the areas we are going after.

From a financial projection point of view, we focus on the US wholesale business.

We look at it as a low to mid single-digit kind of growth, 2% to 5% depending on the year.

So we are not planning for dramatic growth there, but we are -- Ken Duane and his team are clearly going after that market share more aggressively.

But I think, given the dynamic of the business, we don't want to get ahead of ourselves, and given the exclusivity until we have it in hand, we don't want to start projecting that kind of growth.

When we look at what we really think is the opportunity for us as we go forward in the United States and North America is, within our retail footprint, we operate about 175 stores.

We will continue to open stores as appropriate.

We think the combination of new stores and comp store growth will drive mid single-digit growth for us in the retail side of our business as well.

So that is the US market as we present it.

It is very important for us that as much as we need to grow, we need to keep the brand positioned at the collection price points.

We don't want to see the brand being dragged down into a classification price point.

So this is a very similar to Calvin in Polo.

This is a $40 brand out the door.

We want it positioned as a $40 brand on the floor.

We continually are improving that AUR out the door, and we are on our way to do that over the next couple of years.

So that is as important as growing the business because the US market to a great extent the Tommy brand being a US brand sets the tone for what the brand stands for around the world.

And the Renaissance that the brand has enjoyed since 2006/2007 in the US, we don't want to go back on that just for the sake of growing the business.

Karru Martinson, Deutsche Bank.

When we look at the incremental advertising costs that you're going to be doing this year and that campaign here that is launching in the first quarter, is that going to continue into the second quarter, and should we see some depression of numbers there and then ease up in the second half?

No.

I think what you will see is you will see advertising level off.

And, in fact, I think in the second half, depending on the market conditions and what goes on, I think you will actually see -- I think in the fourth quarter, as we have got more balanced spend this year, just a little bit less than the fourth quarter of 2011 than we saw in 2010 since we are making such a meaningful spend spring.

So we have tried to be a little bit more balanced spring/fall than we were last year.

That is one of the reasons.

So I think you will see it evening out as we go forward.

And then when we look at the debt reduction for this year, the $450 million, you guys have definitely brought down your leverage as you said in the original deal.

When you look out, when do you kind of make that shift from debt reductions to looking to -- for tuck-in acquisitions or beyond that?

I think we have to get through this year, pay down the $450 million of debt that we are projecting for this year.

That will take our leverage probably below 2.5 times, and I think that is area where we start to be much more comfortable looking at other capital uses -- other uses of our capital as we go forward.

So, again, not until we get there, so this is, again, a critical year for us to deliver the operating results, but also deliver the cash flow so that balance sheet is in good shape so we can really use it as we have done in the past as an asset to drive the growth of our business.

And I realize it is very early, but starting to see -- hear that spring of 2012 and beyond cotton prices will be coming down in a meaningful way, are you seeing anything in actuality in the market as we look forward?

All I am seeing is that the spot rate is moving around coming down.

But actual buying of goods has not happened yet.

We see the same thing you see, and now it needs to materialize -- actually materialize at the factory level.

So we are not out buying spring anywhere yet, but indications are what you have said.

Now meaningful, I'm not so sure how meaningful, but hopefully we will see some less pressure on costs going forward.

00.

It has been over an hour, so this will be our last question, operator.

David Glick, Buckingham Research Group.

Just a quick one, Manny.

You really have not touched on the China opportunity.

A lot of your peers obviously growing their business very quickly and becoming meaningful businesses for them.

Can you give us an update on the Hilfiger effort in China and when that could be a real meaningful contributor?

Sure.

I guess just to remind everyone, we have about a $40 million Tommy business in China today nicely positioned.

The brand is very well regarded.

The consumer knows the brand.

Its price positioning is perfect.

It is not as expensive as the Calvin price positioning, which is Bridge pricing with CK.

So it is just under that.

So it really has got a -- it's in a sweet spot from a growth point of view.

And what it -- the situation that we have is we are in the process, and I think it is August 1, the second half of the year -- we take -- we are buying that business and taking it in-house.

Now by that I mean is we will continue to receive royalties, but we are establishing a joint venture with a group of partners, and we will operate the business that way from a joint venture point of view.

We will own just under 50% of the business, so we won't be consolidating it.

But we will be having the operating profits associated with that, including on our business, as well as the royalties associated with that included in our business as we go forward.

So we think China is a real opportunity to put into perspective.

The Calvin Klein business as of the end of 2010 of all categories is about $125 million and growing at a double-digit rate.

We clearly think that Tommy could grow at a similar rate and can have some type of similar accelerated growth that will benefit us.

The deal that we have struck gives us an opportunity to buy the full joint venture going forward in year four or year five of the agreement.

So we have that opportunity as we go forward, and we will play that out as we see fit.

So a lot of flexibility with the business, and China, as we look at it, continues to be a very strong growth market for us, both for Calvin and Tommy.

With that, I would like to thank everyone for joining us.

We look forward to speaking to you again on our first-quarter press release call at the end of May.

Thanks for a great day, and one last time we just want to thank Pam for all her extraordinary service over the years, and we are surely going to miss her.

Thank you.

Have a good day.

Thank you, sir.

That does conclude today's teleconference.

We do thank you all for your participation.