PVH Corp (PVH) 2011 Q3 法說會逐字稿

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At this time, I would like to turn the conference over to Chairman and CEO Manny Chirico.

Please go ahead.

Thank you, Robert.

Joining me on the call this afternoon is Mike Shaffer, our Chief Financial Officer; Allen Sirkin, our President and Chief Operating Officer; Ken Duane, the head of all of our Wholesale businesses; and Dana Perlman, our Treasurer and head of Investor Relationships.

We are very pleased with our results for the quarter.

We beat the top end of our third-quarter earnings guidance by $0.08 and, given the momentum in our business, we also took up the fourth quarter by raising our full year guidance by $0.13.

Let me start with our Calvin Klein business as I get into each of the individual components.

Our Calvin Klein business continued its strong growth momentum.

Total revenues in the third quarter for our combined Calvin Klein businesses were up 11% and operating profit increased 13%.

The Calvin Klein wholesale and retail businesses that we operate directly posted a 13% sales increase in the quarter.

The strong performance was driven by our men's wholesale sportswear business as well as very strong performance in our own retail stores.

Our Calvin Klein retail business posted a 12% comp store increase in the quarter.

In our licensing segment, royalties were up 8%.

The business posted strong revenue growth across all geographic regions.

Specifically, North America was up about a little bit more than 7%.

Europe was up 8%.

Asia sales were up about 18% and Latin America, South America were up just a little bit over 20%.

Moving on to some of our big categories and businesses, I'll start with underwear.

The Calvin Klein underwear business was ahead about 11% in the quarter with all regions, Europe, Asia, and the Americas, posting strong sales gains.

This growth was driven by the continued growth of the international retail square footage and the extremely strong performance of CK One.

CK One's retail results are strong in all markets.

In men's, CK One continues to exceed our plan and has helped us to grow our number one share position within US department stores.

CK One currently represents over 10% of our annual underwear business.

In women's, our Naked Glamour introduction is off to a strong start in all international markets.

The supporting marketing campaign has been very well received.

New product initiatives alongside breakthrough marketing campaigns has been a hallmark of the Calvin Klein underwear business.

This strategy has enabled us to grow our market position globally as the number one intimate apparel [to] gender brand.

Moving on to jeans, our global jeans and related businesses were down 2% for the quarter.

Relatively soft sales in the US and Europe were offset by strong business throughout Asia and South America.

For the fourth quarter, we expect the jeans business to grow in the mid-single-digit range driven by new product, particularly our Power Stretch program which will be a significant initiative for the spring season.

Fragrance, our Coty fragrance business had a strong quarter.

Just as a reminder, we were up against the Calvin Klein Beauty launch in last year's third quarter; and despite that, we posted a 5% increase in revenues.

Business was very good across the board with our Euphoria and CK One fragrance continuing their strong growth.

Our [nuke] fragrance, CK One Shock, launched in the third quarter and we are seeing very strong sales performance in November.

As we look out, we are expecting fourth-quarter fragrance revenues to be up over 10%.

Moving to women's apparel, in North America the business was very strong, apparel and footwear; our royalty revenues with our licensees G-III and [G-lore] are up over 15% in the quarter.

On the apparel side, this strong growth is being fueled by strong selling of women's sportswear and outerwear, and footwear revenues are running ahead about 20%.

In addition, our new handbag and accessory business is off to a very strong start.

G-III has seen excellent sellthroughs at both Lord & Taylor and Macy's.

Our CK bridge business in Asia continues to grow, dramatically posting a 40% increase in revenues for the quarter.

The growth is being driven by China, Korea, and Hong Kong markets where we experienced significant door expansion and double-digit comp store increases.

I am going to move to the Tommy Hilfiger business.

From a brand marketing perspective, we just launched the third chapter in our very successful Meet The Hilfigers campaign as we continue to invest in the brand worldwide.

For the fourth quarter, our global marketing spend will be about $5 million higher than last year.

Our global holiday campaign will have significant exposure in major markets throughout the United States and Europe.

The fourth-quarter marketing plan calls for a significant television and cinema presence in all major markets throughout Europe and the United States.

Overall, all the Tommy businesses had a very strong quarter and significantly exceeded our expectations.

Total revenues in the quarter were up 17% and operating earnings increased 27%.

We exceeded our revenue guidance by $30 million.

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

Let me start with European wholesale business.

Before holiday season, we have seen sales growth of about 15% over the prior year.

On a product category basis, we are seeing double-digit growth in men's and women's sportswear, denim, and footwear.

We are seeing strong growth across Europe for the holiday season.

Business in our largest market, Germany, is running ahead 15%.

Our second largest market, Spain, is reporting healthy growth of about 5% in a very tough market with our key partners there, El Corte Ingles.

Our key growth markets of Italy, France, Russia, and the UK are all growing at over 15%.

In the third quarter -- moving on to the European business, in the third quarter, comp sales were about 5%.

With the exception of Italy and Belgium, all major markets posted positive comp sales.

We saw potentially strong sales performance in France, throughout the Scandinavian region, and throughout Eastern Europe.

Moving to North America retail, we posted strong comps in the third quarter of about 15%.

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 our US wholesale business, we saw good performance at Macy's in both men's and women's sportswear.

Sales are running significantly ahead of last year and sellthroughs at retail are above plan.

Our average unit retails in the quarter are running up about 7% over the prior year.

Moving to our Heritage businesses, revenues were down 2% in the quarter driven by a 7% decline in sportswear sales, which was partially offset by a 4% increase in dress furnishings.

Our Heritage retail business posted flat comps for the quarter.

Operating earnings for the quarter were down significantly.

Driving this decrease was the decline in gross margin rates from the impact of higher product costs, relatively flat sportswear selling prices, and the challenging competitive environment which has driven more promotional sales than planned.

For the fourth quarter, we are planning for these trends to continue and have taken aggressive actions to move inventory and ensure that year-end inventories are very clear.

Our fourth-quarter guidance fully contemplates all of these actions.

Moving out and talking about our trends in the early fourth quarter.

November, we are off to a very strong start in November.

We saw business accelerate over our strong third-quarter performance.

In particular, the business trends in Calvin and Tommy continued to outperform our plan.

In our US retail business, comps for our Calvin Klein and our Tommy Hilfiger businesses for November ran ahead over 15% against the men's single-digit comp store plan.

Comp store, our Heritage businesses are running up in the low single-digit against a flat plan.

Moving to our US wholesale business, both Calvin Klein and Tommy continue to perform ahead of sales plans.

We have not seen any significant customer resistance to our increased fall retail selling prices.

In dress furnishings, we have also seen excellent success passing along the higher selling prices, and retail prices are up about 8% to 9% in our dress furnishings business.

As I said, we continue to see a difficult market for our Heritage businesses on the main floor.

Moving to Europe, in Europe, our wholesale business which represents about 70% of our business continues its strong momentum.

Our Spring 2012 order book closed, being up about 13% against last year's bookings.

We have also booked prefall which is a relatively small season but it's a good indicator for how fall may turn out and bookings there are running ahead 15%.

At retail in November, as the weather turned cold, we saw a significant acceleration in Europe.

Our comps in Europe for the month of November are ahead 15 -- above 15% against a 4% comp store plan.

We saw a dramatic improvement in Italy which was running minus 12 and is now comping in November plus 12.

In Belgium we were down 10%; we saw our business go to plus 11%.

In Germany, our largest market where our comps were up low single digits, we have seen our business go to double-digit increases, and that trend has been consistent across the board, seeing very strong selling throughout Europe.

It is good to see the brand is being well-received by the consumer and as the weather turned, that cold weather apparel really kicked in.

Finally, I think we have been prudent about our estimates for the fourth quarter.

We feel we've put together projections that we can meet and, if trends continue, we could beat as we go forward.

We believe that the momentum we see in our Calvin Klein and Tommy Hilfiger businesses will continue to drive our growth and should allow us to continue to outperform our current projections.

And with that, I'll turn it over to Mike to quantify some of the detail.

Thanks, Manny.

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

Our revenues for the third quarter were $1.654 billion.

Revenues for the quarter were greater than our previous guidance and 9% greater than the prior year.

Driving the higher revenues was strong performances in our Tommy Hilfiger and Calvin Klein businesses.

Our Tommy Hilfiger business delivered revenues of approximately $827 million, 17% greater than last year.

Driving this increase was a strong wholesale performance internationally as well as strong retail comps of 15% in North America and 5% in Europe.

Also contributing to the Tommy Hilfiger revenue increase was a benefit of approximately $25 million from a weaker US dollar in the quarter versus the prior year.

Our Calvin Klein businesses had a strong quarter as well with revenue increases of 11% fueled by wholesale growth, strong retail comps of 12%, and royalty revenue growth of 8%.

Overall, Heritage business revenues were down 2%.

Within the Heritage business, our dress furnishings business posted a 4% revenue increase while our retail revenues were flat to the prior year.

Our wholesale sportswear business had a difficult quarter with revenue down 7%.

Operating income for the third quarter was $227 million, a 5% improvement with a $12 million increase over the prior year.

Driving the increase was our Tommy Hilfiger and Calvin Klein businesses, which had an earnings increase of 27% and 13%, respectively.

And this was driven in large part by the revenue increases I previously discussed.

Also favorably impacting operating income in the Tommy Hilfiger businesses were operating expense synergies.

Our Heritage business earnings for the quarter were down 33% versus the prior year.

And this is a result of the revenue decrease as well as significantly lower gross margin rates in sportswear and retail.

The current promotional environment has made it difficult to pass price increases on for our moderate brands.

Inventories for the third quarter were 21% greater than the prior year.

Our inventory increase reflects higher product costs and a higher level of core product inventories primarily in our dress furnishings business.

All inventories are on plan and very clean as we have been aggressive in dealing with our Heritage divisions.

Moving to our guidance for the year, our revenues are planned at $5.825 billion to $5.854 billion(sic -- see Press Release), an increase of about 26% over last year.

Tommy Hilfiger revenues are planned at $2.99 billion to $3 billion and compares to $1.95 billion for the nine-month period last year.

Our Calvin Klein revenues are planned up between 13% and 14% and Heritage revenues are planned to grow about 1% to 2%.

We are planning our gross margins down about 120 to 130 basis points as a result of products cost increases.

Our expenses are planned to be down 80 to 90 basis points reflecting an expense reduction in SG&A leverage.

Operating margins are planned at 11.4% to 11.5% of sales.

We have raised our earnings per share guidance to $5.23 to $5.25, a 23% increase over the prior year.

This increase reflects the $0.08 actual beat over the high-end of our quarter 3 guidance and an increase in quarter 4 of $0.03 to $0.05.

Our tax rate for the full year is estimated to be 29% to 29.5%.

We have revised our tax guidance to reflect a higher level of international earnings, which detached at a lower rate than our US earnings.

For the fourth quarter, we are planning revenues of $1.467 billion to $1.487 billion, an increase of 5% to 6% over the prior year.

Driving this increase is our Tommy Hilfiger business which is planned at a 7% to 9% increase over the prior year as well as our Calvin Klein business, which is planned to increase 8% to 10%.

Our Heritage brands are expected to be relatively flat in the fourth quarter as compared to the prior year.

Overall, we are planning our gross margins down approximately 200 basis points in the fourth quarter as a result of product cost increases.

Our expenses are planned to be down approximately 100 basis points, reflecting expense reductions [and] SG&A leverage.

Operating margins are planned down approximately 100 basis points in the fourth quarter.

We are projecting fourth-quarter earnings per share to be $1.03 to $1.05.

That is an increase of 11% to 13% over the prior year.

And finally, even with our Tommy Hilfiger [indie] acquisition, we are projecting debt repayments of approximately $165 million during the remainder of 2011 which will bring our total repayments since the Tommy Hilfiger acquisition to approximately $700 million.

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

(Operator Instructions).

Robert Drbul of Barclays Capital.

Good evening.

A couple of questions.

First on European business, the pickup -- you think it's all weather or could you maybe shed a live more insight in terms of that acceleration that you have seen since the quarter ended into November?

I think clearly weather played a role in the acceleration.

I think there was pent-up demand for cold weather apparel and once it turned, the consumer turned on.

You know, for me to try to give you insight into what is going on in Europe with all the volatility that is going on there is hard.

I can just tell you what's going in our business and the trends we've seen.

And we've seen a real acceleration against the trends in the third quarter which weren't particularly bad, but just weren't as strong as we were trending.

So I think from that perspective that's the best I could do.

Clearly, Northern Europe continues to be stronger overall, both in our wholesale business in Southern Europe, no surprise.

And since our business tends to be skewed more towards Central and Northern Europe, I think it's part of the reason we are not hit as heavily as some of those markets.

Got it.

And, Manny, can you talk a little bit about the MSRP increases versus AUR increases in all brand and sort of how that has been trending for you?

And how much of a hit is the Heritage pricing challenge that you have had thus far?

And how much -- is there much more risk in it or do you think you have it all contained?

I think we have it all and I think we've been pretty conservative on the fourth quarter projections, how it has come together.

So I think we have contemplated -- contemplated it all.

I think it has been a real -- on the Heritage side, we just haven't had the ability and you can see that in the third quarter our gross margins for the Heritage, overall, are down over 400 basis points and that is the pressure it is putting in.

With our flat -- with relatively flat selling prices up 1% and costs up 15%, that is the kind of pressure we are seeing.

And obviously, it is more severe in sportswear since dress shirt is actually doing well.

So that business is under pressure.

On the Calvin and Tommy side and on the dress shirt side, we have really seen little resistance to the price increases.

As we have asked for the goods especially on fashion product, we have been able to have the customer pay up for it.

We have put more into the product and I think we are well-positioned from an inventory point of view, and I think if weather gets a -- if weather here in the Northeast cooperates a little bit and gets cooler, we could really even see some more acceleration there.

As you would imagine, sweaters have been under pressure everywhere and it is a big portion of what holiday is all about.

So overall, I am very happy the way Calvin and Tommy and dress shirts, the way the consumers are reacting to our price increases.

Great.

Then just one last question for Mike.

The tax rate.

Is the update on the tax rate, is that the way to think about it going forward as well?

Yes, the way I would think about it is as our international earnings grow, the European business is taxed at a lower tax rate.

So as that business grows, if it outpaces, we will see continual declines in our tax rate.

There is nothing in our rates for this year that I would consider something that wouldn't repeat next year.

So as we move forward and that European business continues to grow at a faster rate, I do think we can see some improvement in our tax rate.

Great.

Thank you very much.

Adrianne Shapira of Goldman Sachs.

Manny, your comments about the holiday weekend very encouraging, the strength that you are seeing.

Could you just maybe walk us through -- you know, today we got obviously a lot of sales, the level of promotion and perhaps pull-forward you think that happened on the weekend?

How much -- how aggressive were the promotions out there to drive that kind of strength over the Thanksgiving weekend?

I think in areas it was very promotional and we needed to drive it clearly on the main floor, in department stores across the United States.

There was a promotional event in those businesses between the couponing and the promotions.

Clearly volume was done, but it was done at a price.

But on the collections floor, although we were promotional and we were there to do business on a comparative basis year-over-year, our AURs were up in the high single digits.

So we were very happy with the way -- how that transacted.

That premium consumer, as you work your way up the supplies, the distribution channels, clearly -- if we use Macy's as a benchmark -- their collection business is very strong as demonstrated in our businesses, and I think that more moderate consumer has been under more pressure.

I think there's more inventory sitting there as well be it private label or some other brands, and that competitive pressure that is being applied is putting pressure, particularly on the main floor, and then, look, you get some categories, sweaters and outerwear, with the weather being as warm as it has.

I think that has got -- that has the potential to get promotional as we go forward.

We don't have a major exposure there, but on the outerwear side, but sweaters is big for everyone.

So we are being cautious about the last part of your question which was the pull-forward.

It is hard to determine.

I don't have a crystal ball how much people have come out.

All I can say is in our own retail stores the last three or four days and on the weekend going in, we didn't see any pullback on Saturday and Sunday, and it is a weekday sale.

But we haven't seen any real pullback in the first three days of December.

So it is hard to judge where -- usually you expect to see some kind of lull in the two weeks, the first two weeks of December.

We'll see how that all plays up and then accelerate again.

But right now we are planning for that lull.

But if it doesn't happen, clearly we have a real opportunity to outperform.

That's very helpful.

And then continuing on that line of thought, the premium versus moderate you started the year as we thought about inflation and how that impacts your margins at 150 or 200.

It sounds like now at the year end where it is now only down to 120 to 130 basis points for the year.

Just help us think through that's clearly a function of -- was Heritage pretty much in line with your expectations and the improvement with Calvin and Tommy?

How about improvement kind of progressive year?

And then as we look out next year, you have been helpful in sort of getting us early on thinking about the pressure.

Help us think about where the opportunity is on perhaps calling back some of this margin.

Sure.

I think -- okay.

On 2011, I think for us, I think what you -- I guess our plan, Heritage underperformed on our ability to raise prices and that has cost us on the gross margin line.

And then, we are anticipating that to continue through the fourth quarter.

What the Calvin and Tommy clearly outperformed on that line in our dress shirt business has clearly outperformed on that line.

And the mix of business with the strength of the Calvin Tommy and our dress shirt business growing as they are, they've become a bigger portion of our business.

So that is why you are seeing a skewing on the gross margin line.

So we are outperforming on the top end in dress shirts and underperforming in Heritage.

It is a relatively small piece of our business on a percentage side, but -- big business but small in total as a percentage.

So that is the story for 2011.

As we look at 2012, overall for the fiscal year we are looking at flat cost increases, but it's really a tale of two parts of the year.

We would expect the pressure on cost to continue into spring.

So, spring over spring where we are anticipating cost increases is up.

Let's use a number, 10%, and when we turn to fall, we are expecting that to reverse itself and be down 8 to 10 overall for us to be down -- to be flattish right now.

Could we do better than that?

Depending on what happens to fall, that has to play itself out.

And there's a lot that still variables out there, but we feel comfortable right now to say that on an annual basis, costs will be flat.

The one benefit that we do have is we are getting in our bigger businesses higher selling prices today, so that should benefit next year.

In Europe, where we have had an approach to deal with the cost increases as raising retail prices in step, we raised prices in fall.

We raised them slightly again in holiday and we plan to raise them in spring.

So, we have an ability there to improve the gross margin race as we go forward.

So, that is a positive as I think we go forward.

So, we are feeling pretty good about it.

When you think about next year, we feel good about the year in total, but I think it will be for everybody in the industry.

When you are looking at earnings growth it will be more second-half weighted than first-half weighted.

Very helpful and then the last is just a question for Mike on the inventory, the up 21%.

Any way maybe you could parse out how much of that is driven by higher product costs versus how much on the dress furnishings, the investment you are making there?

Can you give us a sense of how the confidence in terms of how clean the inventory is and how much is due to higher product costs?

Sure.

You know, we've been talking about cost increases up about 15%.

So I would assume my inventories at cost are up about 14%, 15% in the dress shirt business, the basic business that we carry, we have increased those core, the basic programs somewhere around 5% to 10%.

Great.

Best of luck.

David Glick of Buckingham Research Group.

Thank you.

I just wanted to take that one step further if I could and just in terms of how to think about next year.

You guys have been executing extremely well in a really tough environment and you are starting to get some relief at least on the cost line in the second half of next year.

So is what you outlined for us do you think it's still reasonable that, given what you know today and some of the early signs and bookings in Europe, maybe that could be better than you may have thought a few months ago?

Is it still reasonable to think that the typical sort of midteens plus earnings growth is possible, given what you know today?

Yes, I don't think there is anything going on in the business that would change -- we are not giving guidance today.

But just as a conceptual framework for next year, we have got a lot of work to do to get there.

There is nothing that we see today that should in any way change our thinking of our earnings growth next year, given the business would be one exception that --.

Just given the volatility of the market I just have to tell you the chaos in the market and the macro environment that goes on, absent something really chaotic happening, I don't see any reason why we couldn't continue to grow on, on the trajectory that we talked about since the Tommy acquisition almost two years ago.

So feel good about that, and I think as I said to the last question, I think you just have to think about next year very similar to this year from a timing point of view.

I think it will be back end-weighted from an earnings growth point of view just given some of those dynamics.

I think we could manage some of that with our expenses and how we do other -- and with the growth that we see in front of us, but I think you have to consider that I think second-half growth will be much stronger than first-half growth.

And under that scenario, just if I could shift to Mike, how much debt do you think you could pay down next year?

And at what point is your balance sheet really in a position where you could think about making another accretive acquisition?

I guess from a debt perspective, we've talked about targeting $300 million per year in terms of paying down our debt.

That has been on [prospectus].

And I don't think anything has changed there and from a balance sheet point of view, I think we have talked about trying to get between 2 to 2.5 times leverage and I think we will -- given the -- if the fourth quarter pans out the way we expected, we should be at somewhere in that range by the end of the fiscal year.

Great.

Thank you very much and good luck in the holiday quarter.

Jeff Klinefelter of Piper Jaffray.

Thank you and congratulations on a great performance.

A few questions about your comps and historically where they have been tracking.

I think you gave us the 5% comp out of Europe.

What was Europe specifically in Q1 and Q2 of this year?

I think you have been giving us overall total international comp during those first couple of quarters.

I don't have it in front of me, but directionally it was double-digit comp store increase and whatever the international comp was probably add 200 basis points to it.

Because Japan, which is the other piece of it, has been running relatively flat for the year given all the -- with the exception of the first quarter which was the earthquake.

So Mike is handing me the piece of paper as we speak.

So, this is Europe -- sorry, Mike.

So Europe was up in the first quarter of midteens in the second quarter high teens, and then, obviously, in the third quarter about 6%.

Okay.

And then what is sort of incorporated into the fourth quarter?

Did you mention that?

We -- yes I said -- I think I said specifically about a 4% comp store increase.

Okay, so you are looking about a sequential -- sequentially neutral kind of comp trend more or less in Europe in the fourth quarter?

That is what the guidance is built on.

The actual trend is 15 for the first five weeks.

Okay, great.

And on your marketing, your global marketing clearly has been very effective this Hilfiger campaign.

Do you share any perspective on what do you think are the most positively impacted categories within your offering?

When you think about by gender and also by product category, I would imagine that a few of those have really appreciated as a result of the incremental spending.

And what would those be?

Are they similar globally to the -- internationally to the US?

Let me -- men's -- by far the biggest growth we have seen is in men's and women's sportswear, internationally and domestically, in our own stores.

Internationally as we have taken over the footwear business the last two or three years, we have seen very strong growth there.

I think the campaign has helped everything.

I think operationally the ability to bring that business in-house has been what has enhanced the growth there more than the marketing campaign.

And I think to get the European footwear, the European footwear business is all over EUR100 million is a great performance, but relative to how big the apparel business is, I think it is just growing into what naturally should be $150 million, $200 million business over time.

So I think it was -- I think those are the big categories that have grown.

In the United States, our kids business continues to be very strong and I think it is benefiting along with the gender category -- to the men's and women's sportswear.

So we have seen very strong growth across the board in Tommy.

I can't just -- I can't put that all on to the campaign.

I think it is also been great execution by our licensing partners and I think it has been a great execution by our operational team.

But clearly, the marketing has played a significant role.

Thank you, that's helpful.

One last point.

Next year we are going to start lapping some of the cost increases.

We are going to lap some difficult Heritage margins.

Assuming the global business, Tommy, Calvin Klein, etc., continue to grow at these rates, it's -- the potential for pretty meaningful op margin expansion, can you give us a perspective on what your investment philosophy would be in terms of continuing to step up marketing and any other investments you need to put in place?

Is it realistic to think that that could go up 100 plus basis points?

Or will you invest into the cycle?

No, on the Heritage -- let me take it in pieces.

On the Heritage side, that is a business that we've historically has operated at margins that have been between 10% and 11%.

And this year, on a consolidated basis, we will be under 8%.

So clearly there, we believe over a 24-month period, we can, we will claw our way back to 10% to 11% operating margins, dress shirts, retail, and wholesale sportswear.

And I think that that is an opportunity.

I think in order to do that, it is really not about making significant investments in those businesses.

There's nothing broke in those businesses.

Those brands are national brands with strong consumer recognition, and these are businesses that we run on a return on investment basis and a cash flow basis.

And we are able to do that because they represent between 15% to 20% of the total portfolio.

So I don't believe significant investment is required there to claw our way back to those operating margins and that strong cash flow.

I think on the Tommy and Calvin point of view, we have clearly upped the spend on those brands and anything that we choose to do will be discretionary in nature and will follow just strong performance in business.

So there is no need for significant investment.

We are I'll just say buying back some licenses, particularly on Tommy, and some of those businesses will require some modest startup costs.

Nothing dramatic.

On an annual basis $0.04 to $0.05 a share, but just as we're going through, we like to be transparent so you understand it.

As we look at some of these businesses and these growth opportunities that we think are significant, we are making some investments in those businesses also as we go forward and as we get closer to giving guidance next year, we will lay that out, all out for you.

But, short answer that I've gone on for a bit is nothing in the business will require significant -- dramatically different investment philosophy than what we've had for the last two fiscal years.

Thank you very much.

Robert Ohmes of Bank of America.

Just two quick follow-up questions.

One follow-up to just question on Heritage.

How are you thinking about planning that for next year?

Is it to get that margin back up over time?

Do you think you have to shrink the business or what do bookings and backlogs and those discussions look like, given what is going on in everybody's moderate business apparently right now?

And then the second question is -- I was just curious -- on the European wholesale bookings, can you give us a sense of how much of it is same door growth versus new door growth?

And how much of it is driven by product extensions and just maybe a little more color on the 13% spring, 15% prefall numbers that you gave us?

Thanks.

Let me start with on the Heritage site, we are getting out of some businesses that weren't significant moneymakers, particularly the Timberland business, as you know.

That is about an $80 million business on an annualized basis.

So that will be gone by the end of the fourth quarter or the beginning of the first quarter.

Besides that, I think we really would be thinking that the businesses -- when you put it all together -- will be relatively flat.

We are really taking aggressive actions in the fourth quarter to make sure we are going to end clean and not have any inventory issues both in-house or at the -- our customers to really move through that inventory and get it down and mark down priced appropriately and take what measures are necessary.

And I think it is really cleaning up, getting the supply and demand in balance.

But I think overall where we usually we talk about 3 to -- 2% to 4% kind of topline growth in Heritage, I think next year -- take Timberland out of the equation on both sides, I think we would say we will be more flattish at best with dress shirts continuing to grow, Heritage wholesale probably shrinking a little bit and our retail businesses comping in the low single digits.

So that gives you a sense there.

On the Tommy question in Europe, I think that maybe the better way to answer -- I understand what you are trying to get at, maybe the better way to answer it is more on a country by country basis.

You know where we are, large.

If you look at the spring, if you look at some of our big markets like Germany, Germany is growing about 10%.

That is not significant door expansion, but it is significant category expansion at some of our major customers where we are double exposing some of our product.

We are [able] to get larger presentations because of our performance.

So I wouldn't necessarily call it pure comp, as we are getting more square footage, but it's also not new door openings in Germany and that business in Germany is up.

The bookings are up about high single digit as we go forward.

Market like Spain, which is a tough market even in that market, the business will be up low single digit.

The growth markets for us, which are the UK, which is being planned up about 15% for spring; if you look at the Middle East, Russia, we are planning that up over 20%.

France is very strong.

That business is up over 20% as we would be adding doors and growing square footage in a country that you have the potential over time to be about 80% of what Germany is.

Italy, which is a tough market, we are still growing that market for spring in the high single digits.

And when you put that all together, that 13% growth is really coming from those markets and I think it will continue to be driven by the strength of the brand, new product categories that we are adding, both bringing back in some licensees and just some new product categories intimate, underwear, bodywear as we go forward and footwear, continuing accessory opportunities to grow.

And in those developing countries that we really believe our growth for Europe.

That's great, that is really helpful.

Thanks so much.

Evren Kopelman with Wells Fargo.

It's Marion Casper in for Evren.

A few quick questions.

You guys noted that the US wholesale business is above plan in November.

Is that based on sellthrough rates or actual wholesale revenues?

And then also you expect Calvin Klein jeans to be up mid single digits in Q4 versus down two in Q3.

How much visibility do you have into that and what drove the weakness in Q3?

Okay, I think [Luis, let me take the last part of it is, I think, our licensee there] Warnaco, which does a great job both with underwear and jeans, I think they thoroughly discussed the US issue.

A lot of it was timing of sales in some of the special membership club business and there was timing there from that point of view.

And I don't think it is a surprise to anybody.

In the US in particular, denim is just a tough category overall and a lot of the strength you see -- and I think as you would expect, we are seeing big increases in our men's and women's sportswear refined, sportswear businesses; we are seeing big increases in our tailored clothing businesses, so I think when you balance it together it all makes sense.

But the jeans business in the third quarter was impacted in the US by timing of shipments and then just a soft market.

We have got -- we have got very close relationships with Warnaco.

We understand some of the new product initiatives that they have going on, what they are up against from last year's fourth quarter.

And I think I am comfortable saying that they are comfortable with planning that -- planning their overall jeans business at least up in the mid-single digit.

And I think they might have even been more aggressive on their quarterly call.

So I'm pretty confident about how that business is being planned out.

Okay.

And then on the US wholesale business running above plan, and then so is that actual sellthrough?

Our is that sellthrough rates or actual wholesale revenues?

For the most part that is sellthrough.

Planned selling in and sellthrough, that particularly on the sportswear side, in dress shirts which is really an ECI business that is a replenishment business and that business is running ahead is running ahead both on a sales plan base and since you fill in product there as on an [ECI] basis, we are also seeing the increases on a wholesale basis as well.

Thanks, that is helpful.

Howard Tubin of RBC Capital Markets.

How are you thinking about inventory?

Where do you think it will come in, end of the year?

And how are you thinking about it for next year?

I think as -- we have talked about the inventory and Mike laid it out pretty well.

I think the -- we have been really trying to manage the inventory dealing with a lot of the sourcing dynamics around the world and concerned about the supply-chain.

And I think as I said on the second-quarter press release, we moved up deliveries 30 days across the board and made the decision on categories to carry more inventory on an average basis as we have gone forward not necessarily buying more goods for the season, but bringing goods in earlier.

It has helped us in a lot of ways in order to meet demand at retail that we had goods in, we could accelerate goods and then accelerate back shipments.

So it has been a positive for us as it is going forward.

But that wasn't the driving force and that is about half of the increase that you are seeing each quarter in the second quarter and the third quarter as we have gone forward.

So I think that is a piece of it.

For year end, I think we are planning our inventory should be more in line with our sales increase.

I think it will be up a couple of points higher than that because we are going to continue to carry some more forward dress shirts inventory as we go forward, but I think you'll start to see it become more in line with our sales expectations as we go forward.

That's great.

Thanks.

Kate McShane of Citi.

Manny, I think this is one of the first quarters where we haven't seen that you are increasing your marketing dollars when giving guidance for the following quarter.

I just wanted to hear your take on why that may be the case and your view of on overall marketing expense for the brand?

So I want to keep consistency, I think -- I don't think we talked about it yet, but I think in the press release it does talk about that we have increased the fourth quarter marketing spend $5 million and that we are going to be year over year in the fourth quarter at least $5 million higher than we were last year.

So that is where we are and that is up against a pretty substantial spend in Calvin and Tommy last year.

So we feel good about that and we think it is going to continue to drive the momentum in the business.

Okay, great.

Sorry about that.

I didn't see that.

And then, I know one of your customers sounds like they are going to go to EDLP possibly in 2012.

And I just wondered if the Company had any view or visibility into what that might mean for your business?

Well, look, I think in general, I don't think that situation has been totally clarified and clear.

I think we are talking about -- we are talking about JCPenney, obviously, and I think it is up.

JCPenney is a key customer for us.

JCPenney has always been a great partner for us.

We believe we are going to try to support JCPenney every way possible with all their initiatives and some of the discussions that they've had, but they have been very clear to us and we've talked to them pretty dramatically about what is going on that they haven't totally revealed their marketing plan.

They haven't totally laid out their strategy.

We have got some indications about where they are heading and we are digesting that strategy, going to react to it and go forward with it.

So we are still in the early stages and I don't think that has been totally laid out.

As soon as it is, I think we will react to it and I think we will support them in every way possible.

Okay, great.

Thank you.

My last question is just you had mentioned on buying back some of the Tommy Hilfiger licenses.

I just wondered which ones they were and what is the longer term strategy with regards to buying back licenses?

Well, I think pretty consistent to what we've said before, we bought back [India] in the third quarter.

In the second quarter at the end of the second quarter, we close the transaction on China and brought that license back and set up and both of those are now joint ventures where we own 45% and 50% of the Indian business and 45% of the China business.

We also brought -- as I mentioned we brought back footwear last year.

We continue to look at potential opportunities.

Nothing has been finalized, but there are mark -- there are geographic markets that might make sense to continue the kind of joint venture strategy.

And one would-be portions of South America, particularly as we go forward.

The tailor area is something that we are very focused on given our dress shirts, expertise over time is something that we may want to really look at.

And so those are the types of the areas we think we -- philosophically, geographic areas as we take them back in, if they are areas where we are not have -- currently have operations in, we like this model of being involved on a joint venture basis where we can get local expertise to really get us through the day, understands, set up the business, and then buy the business at some -- the balance of the business at some future date.

It could be four to six years out, but we think that is a way to avoid a lot of significant startup costs, but also participate in the rollup and the growth as we look forward.

Okay, great.

Thank you.

David Weiner of Deutsche Bank.

Good afternoon.

Two quick questions.

I guess the first on the euro, obviously been very volatile/weak.

So I guess my question two parter is, have you made any changes into your planning assumptions for your euro rate?

And then, also, if you could just remind us what the sensitivity is to earnings so as the euro moves how does it impact earnings?

And then second question, just maybe a quick update on your planning and how you're coming along in planning for your business in China?

Tommy business in China.

Thanks.

I'll do the euro.

We plan the euro for the fourth quarter quarter at $1.30, about $1.35.

Where we are through this through today, there's very limited risk on the euro as we look for the full year.

And the way to think about the exposure, what we talked about, was a full year was -- each move in the euro about each $0.01 was worth about $0.02 of EPS, $2 million or so.

Of EBIT.

So we -- having based on where we are today midway through December, there's just very limited risk on this year.

As we look forward and as we plan next year, we will obviously have to regauge where we are and how we plan that.

Just a reminder, we do gauge -- we do hedge our purchases on all our product on European purchases.

We go 12 months out.

So we do a rolling 12 months.

So we have already hedged through next December at this point.

Thanks.

On China, China, we believe, is a significant growth opportunity for Tommy.

To put it into perspective, the business today is about $45 million, $50 million business in China.

It is and -- compare that to Calvin.

Calvin is well over $200 million today so there's real opportunity for Tommy.

The brand is well known.

The brand has got strong demand at the consumer level.

We are basically operating a model where we operate a number of stores through the joint venture directly, but the vast majority of distributors, franchisees, key players that know those -- know the geography, open stores, buy from us on a wholesale basis, set it up.

It is a great model for us.

We think it's one that we can move quickly with and to grow and to remind everyone we are not 100% owners there of the operations, but we collect, obviously, a full royalty on the sales from China business and we are looking for that to grow and enable [it] at about 20% a year.

That could be conservative in the business really takes off, but right now that is how we are planning as we go forward.

It is a premium price positioning in China just like the rest of the world.

It is not a luxury price position, which I think positions us very well with the consumer there and has the opportunity to be a big business.

Great.

Thank you.

Joseph Parkhill of Morgan Stanley.

I just wanted to ask a quick question about your guidance for gross margin decline [of] 200 basis points in 4Q.

That is an improvement from this quarter.

I was wondering if you could just give us some insight as to what's driving the sequential improvement and how to think about that in the first half of next year.

It's basically mix.

It is just a significantly -- it is a higher quarter for a higher margin business and the licensing business, which has more of a consistent gross margin flow.

So overall it is just a mix [through] our benefit.

So, yes, basically we are planning at the same level of business by business and as Mike said, licensing just becomes a bigger percentage of the business.

Third quarter is our biggest shipping quarter by far.

Got it.

Thank you.

And then, just quickly, I know you said November sales accelerated.

Throughout the quarter, though, did you see the volatility particularly in Europe around the different news items coming out and the market volatility?

Yes.

We saw our volatility, started with the US debt ceiling talks in August.

It got crazier towards the beginning of September.

And then it is hard to measure how much was weather and how much was craze -- was volatility in the world; but they had one of the warmest September/October periods in Europe in a long, long time.

And that clearly played a dramatic impact on the business.

Thank you.

This does conclude today's Q&A session.

I'll turn the call back to our moderators for any additional or closing remarks.

Thank you, everyone.

We would like to wish everyone a happy and healthy holiday season and the best in the new year; and have a great day and we'll talk to you on our first quarter -- fourth-quarter call in 2012.

Have a great day.

And this does conclude today's conference call.

We thank you for your participation and have a wonderful day.