PVH Corp (PVH) 2012 Q1 法說會逐字稿

Good day, everyone, and welcome to the PVH Corp first-quarter 2012 earnings conference.

This webcast and conference call is being recorded on behalf of PVH Corp and consists of copyrighted material.

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The information made available on this webcast and conference call contains certain forward-looking statements that reflect PVH's view of future events and financial performance as of May 23, 2012.

All statements are subject to risks and uncertainties indicated from time to time in the Company's SEC filings, including those identified in the Company's Safe Harbor Statement that is part of the earnings press release that is the subject of this webcast and call.

These include the Company's right to change its strategies, objectives, expectations, and intentions, its need to use significant cash flow to service its debt obligations, its vulnerability to weather, economic conditions, fuel prices, fashion trends, loss of retail accounts, disease epidemics, war and terrorism, availability of raw materials and other factors.

Its reliance on the sales of its licenses and retail customers and its exposure to the behavior of its associates, business partners, and licensors.

Therefore, the Company's future results of operations could differ materially from historical results or current expectations, as more fully discussed in its SEC filings.

The Company does not undertake any obligation to update publicly any forward-looking statement, including without limitation, any estimate regarding revenue or earnings.

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

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

On today's call we have Mike Shaffer, EVP, Chief Operating Officer and Chief Financial Officer of PVH Corp, and Manny Chirico, Chairman and CEO of PVH Corp.

At this time, I'll turn the conference over to Manny Chirico.

Please go ahead, sir.

Thank you, Audra.

Joining Mike and myself on the call is Dana Perlman, our Treasurer and Senior Vice President in charge of Investor Relations; Allen Sirkin, our President and Chief Operating Officer; and Ken Duane, our CEO for North American Wholesale.

Generally, we're very pleased with our first-quarter results.

We beat the top end of the guidance by $0.05, and given the momentum in our business, we also increased our 2012 earnings guidance by $0.05 to $6.15 to $6.25.

Let me jump into some of the businesses, I'll start with the Tommy Hilfiger business.

The Tommy business continued its strong momentum during the quarter.

We posted an 8% revenue increase and a 13% increase in operating income.

When you take out the foreign currency headwinds that we felt in the first quarter, our operating performance was just outstanding.

On a constant currency revenue basis, they were up 11%, and operating income was up 18% for the quarter.

Focusing in on our international businesses, the Tommy international revenues were up 9% in local currencies.

Our retail comps in Europe posted a 5% increase for the quarter, while wholesale revenues were up 9%.

Geographically, we continued to see strong growth in central, northern and eastern Europe, partially offset by softness in Spain and Italy.

On a product category basis, we saw strong performance in men's and women's sportswear, denim and footwear, overall saw strong sell-throughs within our retail department store accounts throughout Europe and feel like we are gaining significant market share during this turbulent time in Europe.

Moving to our North American business, we posted a 12% increase for the quarter, driven by 16% comp store sales increase in our retail businesses, and mid single-digit growth in the Tommy wholesale businesses.

We continue to elevate product and gain additional floor space in top doors at Macy's, which is fueling the brand's exposure.

We see tremendous momentum in this business, and strongly believe that the significant investments we are making in product and in our marketing programs are paying dividends for us with the consumer.

In North America, we are experiencing a 10% increase in our average unit retails at the door at both wholesale and retail.

We strongly feel that our marketing and product initiatives only intensify in the second half of the year, and believe we are well-positioned to continue to exceed our plans for the balance of the year.

For 2012, we are planning our overall Tommy revenues to grow 7% to 8% on a constant currency basis.

Given the uncertain economic environment, we are planning our revenue growth more conservatively for the balance of the year than the current business trends would indicate.

Moving to our Calvin Klein businesses, these businesses continue to exceed our financial guidance and post strong results.

Total revenues in the first quarter for the combined Calvin Klein businesses were up 7%, and operating profits increased 5%.

The Calvin Klein wholesale and retail businesses that we operate directly reported a 12% increase in sales in the quarter.

This strong performance was driven by our Calvin Klein retail businesses, which posted a 9% comp store increase, and equally strong performance in our wholesale businesses.

The business is experiencing comp store sales increases and growth in square footage.

The square footage growth is being driven both by new doors as well as the expansion of existing doors and shops.

For the year, we are planning our Calvin Klein wholesale and retail businesses to grow about 10%, which will be driven by a mid single-digit comp store growth in our own stores and growth in square footage at both wholesale and retail.

Moving to the Calvin Klein licensing segments.

Licensing revenues were up -- royalty revenues were up 2% on a constant currency basis.

The business posted strong revenue growth across all regions, with the exception of Europe.

Specifically, North American sales were up between 4% to 5%, despite a significant reduction in jean sales to the value channel.

Asia sales were up 6%, driven by double digit growth in China, partially offset by soft sales in jeans and underwear in Korea.

Latin and South America sales were up 10%, driven by Brazil, and Europe sales were down 8%, and I'll put some more color on that.

Focusing in on some of our key businesses with our key licensing partners, the overall Warnaco business was down about 6% on a constant currency basis in the first quarter.

This reduction was due to 11% decline in jeans, driven by poor performance in Europe and a $30 million planned reduction in US jean sales sold to the secondary channel.

Moving to Calvin Klein underwear, revenues were up 3% for the quarter, led by strong growth in both US, Asia, and South America.

Our men's business continued to perform well, up 7% for the quarter, with the launch of Bold that is driving that growth.

Women's was down slightly in the quarter, reflecting the timing of new product launches versus 2011.

In 2011, we had the CK One launch with that significant fixture fill in the first quarter.

For 2012, our launches are much more second-half driven and for women we have the launch of Push Positive, which is an innovative new product for women's Calvin Klein underwear.

Moving to fragrance with Coty, our fragrance business continued its strong performance across all regions.

For the current year, our new fragrance launch schedule is all second-half weighted compared to last year's Spring launch of CK One.

Despite that timing issue, fragrance sales were flat for the quarter, and well ahead of projections.

We continue to see strong performance from our Euphoria, CK One and Calvin Klein Beauty franchises.

For the second half of the year, we have two new product initiatives planned.

The first is a new men's fragrance for Fall which will be called Encounter, and the second is a new global marketing and advertising campaign for Euphoria, our largest fragrance franchise.

Both of these launches will be supported by significant marketing and advertising spends, as well as new celebrity talent, which should fuel significant growth in the second half of the year.

We will have much more to say about these two exciting initiatives on our second-quarter earnings call in August.

Moving to our US women's business, our North American US women's apparel and accessory businesses were very strong in the quarter.

Our royalty revenues with our licensees G-III and Jimlar were up over 15% for the quarter.

On the apparel side, this growth is being fueled by the strong selling of women's sportswear, women's performance, dresses and suit.

In footwear, revenues are ahead about 20%, with strong growth in both the men's and women's businesses.

In addition, our new handbags and accessory business continues its very strong performance.

G-III has seen excellent sell-throughs at all department store accounts.

We are targeting 20% growth for this category in 2012.

Our ck bridge business in Asia continues to grow dramatically, posting an 8% increase for the quarter.

We expect this business to grow about 20% for the year.

The growth is being fueled by the China, Korea and Hong Kong markets, where we are experiencing significant door expansion and comp store sales growth.

For 2012, we are planning the overall Calvin Klein loyalty growth more conservatively than in prior years, due to the uncertainty in Europe.

We are now planning royalties to grow on a constant currency basis at 3% to 4%, compared to our prior guidance of 4% to 5%, with foreign exchange providing about a 200 basis point headwind.

The primary driver of this reduction is the weakness we see in Europe, particularly in the Warnaco apparel businesses.

In order to take the financial risk out of those businesses, we are currently projecting the European jeans wear and ck bridge businesses at contractual guaranteed minimum royalties for fiscal 2012.

As such, our overall European royalties are being planned down in the high single-digit range for 2012.

In North America, our royalty revenues plans call for high single-digit growth with department stores being partially offset by a $30 million planned reduction in sales for the off price channels, resulting in overall North American royalty growth of mid single digits for 2012.

Moving to Asia and South America, we see these two regions continuing to grow at double-digit rates.

Retail store square footage, coupled with strong comp store sales increases will drive the growth in these regions.

Our Heritage businesses revenues were down about 3% which was on plan and in line with our previous guidance.

Retail comparable sales growth of 3% was more than offset by 6% decline in wholesale businesses.

Our Heritage business is in turnaround mode, and we feel we are very well-positioned in this business.

Our Fall orders are on plan, inventory levels are in line with our retail sales plans, second-half product costs are decreasing in the range of 5% to 8% and our in store presentations are being enhanced and expanded with key customers.

All of this gives us a high degree of confidence that we'll see a dramatic improvement in this business in the second half of 2012.

Let me move just to some of the trends we're seeing at the beginning of the second quarter.

Our second quarter in May is off to a strong start.

In particular, business trends in our Calvin Klein and Tommy Hilfiger businesses continue to outperform our plans.

In our US retail businesses, the comps for Calvin Klein are running up about 7% while the comps for Tommy are running up about 12%, against mid single-digit comp store plans.

Comps for our Heritage business are running up low single digits, in line with plan.

In the US wholesale portion of our business, both the CK and Tommy Hilfiger businesses continue to perform ahead of sales plans, and we continue to see increases in our out-the-door retails.

Heritage has continued to be challenging, but we're moving through inventory and seeing improvement in Spring and Summer sell-throughs.

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

Our Spring and Summer 2012 season, which started shipping in the fourth quarter is ahead 13% against last year.

For the Fall holiday 2012 season, our order book is up 4% to 5%.

At retail, our comps for Europe have improved from 5% to high single digits against a 3% comp store plan.

Finally, we've been prudent with our guidance and our estimates.

We believe we have taken a significant portion of the risk out of the Calvin Klein European royalties, by planning the jeans and ck bridge royalties at contractual guaranteed minimum royalty levels.

We feel that we've put together sales and operating margin projections that we cannot only meet, but if business trends continue, we can exceed as we go forward.

We believe that the momentum we have seen 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 our guidance and our results for the quarter.

Thanks, Manny.

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

We're very happy with first quarter results.

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

Our revenues for the quarter increased about $60 million, or 4% over the prior year, and were about $35 million greater than our previous revenue guidance.

Revenue growth over the prior year was driven by increases of 8% and 7% at Tommy Hilfiger and Calvin Klein respectively.

Our Tommy Hilfiger revenue growth of 8% includes a 3% or $20 million FX hit.

On a constant currency basis, Tommy Hilfiger revenues were up 11%.

We delivered earnings per share of $1.30 for the first quarter, which was $0.05 greater than our guidance of $1.25 and 6% greater than the prior year.

Our earnings per share beat was driven by stronger than expected revenues for Tommy Hilfiger and Calvin Klein, as our gross margin and operating result percentages were in line with our previous guidance.

Moving to our guidance for 2012, we've raised our full-year EPS guidance to a range of $6.15 to $6.25, an increase of 14% to 16% over the prior year.

Revenues are planned to be up 5% to 6% excluding the impact of foreign exchange and our discontinued businesses.

Including the impact of foreign exchange and discontinued businesses, we're expecting revenues to be up 1% to 2%.

Tommy Hilfiger revenues are planned to be up 7% to 8% on a constant currency basis with Tommy Hilfiger North America increasing 5% to 6% and Tommy Hilfiger International increasing 8% to 9% on a constant currency basis.

Including the negative impact of foreign exchange, we're expecting total Tommy Hilfiger revenues to be up 2% to 3%.

Calvin Klein revenues are planned to increase 6% to 7% while our ongoing Heritage businesses are planning revenues up 1% to 2%, excluding the impact of exiting our IZOD women's and Timberland businesses.

Our total Heritage revenues are planned to decline 4% to 5% including the negative impact of related exited businesses.

Gross margins for the year are planned up about 125 basis points, with expenses for the year planned up about 50 to 70 basis points, due in large part to an increase in pension expense.

Impacting our gross margin and expense in 2012 is our mix of business as a result of faster growth in our higher gross margin and higher expense Tommy Hilfiger and Calvin Klein businesses.

Operating margins for 2012 are planned to increase about 60 to 70 basis points over 2011.

Our tax rate for the year is planned at 23.5% to 24% and reflects the continued benefit of additional foreign earnings, which are taxed at a lower rate than domestic earnings.

Interest expense is planned between $115 million and $117 million, reflecting a reduction to the prior year as a result of debt repayments.

We currently anticipate to make $300 million of term loan payments in the current year.

For the second quarter of 2012, earnings per share is planned at $1.18 to $1.20 or an increase of 10% to 12% over the prior year.

We're planning our revenues to increase about 4% to the prior year, excluding the impact of foreign exchange and exited businesses.

Including the impact of foreign exchange and exited businesses, we're planning our revenues basically flat.

Our gross margins for the second quarter will be up about 125 basis points with all businesses planned to show gross margin improvement, as we begin to sell Fall product later in the second quarter which has shown cost decreases of about 5% to 8%.

Overall operating margins will be relatively flat for the second quarter as expenses are up by a mix of business and as a result of the pension expense increase.

Our tax rate for the second quarter is planned at 26.5% to 27%.

With that, we'll open it up for questions.

(Operator Instructions).

We'll go first to Robert Drbul at Barclays Capital.

The first question I have is a bigger picture question, Manny.

When you look at the European outlook and the performance of Tommy, are you more concerned about your Heritage business performance, given the Q1 results, or are you more concerned about the outlook on the European side?

Look, I guess we get paid to worry about everything but on balance, I think I feel very confident about the Heritage turnaround because the business is in front of us.

We see the cost declines that Mike discussed, the 5% to 8%.

We see where we're positioned from an order flow, with our retailers.

The inventory is in line.

If the inventories are controlled, and we just continue to see the sell-throughs that we're experiencing in Spring and Summer, we should be very well-positioned for second, third and fourth quarters to outperform our guidance and to really see significant improvement in the second half of next year.

So, that seems to be within our grasp, and the only thing that can really screw us up is if inventories get out of line and we lose control of the promotional agenda, which I just don't see happening at this point.

Europe, we've consistently seen strong performance there since the acquisition of Tommy.

We're now on our, approaching our 30th month of running that business, and feeling very strong about the trends in the business, feel very strong about how that business is happening.

But you have to be concerned what you read in the paper and the constant drum beat that goes out there, so it's really a balancing act.

I read the headlines, and then I look at our daily sales reports, and we continue to comp mid to high single-digit comps there and we see our Spring-Summer retail sell-through is very strong.

So, I know we're gaining market share.

I know we're doing everything that's in our control to manage that business.

If Greece pulls out, I can't tell you what impact it's going to have on the consumer and where it is.

So there's this uncertainty that overhangs the business, and I think that's why we've been much more cautious with our guidance.

Given all of that, I couldn't be more confident given where we are in the world that we're going to deliver or exceed the guidance that we've given to the street.

It just seems like there's a lot of momentum in all of the businesses we operate.

Got it, and in terms of the progression of the comps in Europe.

Can you just talk about like, was there a major change from the beginning of the quarter until where you are right now through the second quarter?

No.

I think the trend has been pretty consistent.

It's just all of it has just moved.

So, in the last three or four weeks we've just seen business get better, almost in every market, from what it was three months ago.

Obviously, the [plus five] moving to high single-digit comps for the last three weeks.

Now reading into that, it's a three-week trend, feel very good about it, but I'm not ready now to take that and extrapolate it out yet.

So at this point in time, it gives us confidence and it makes us feel good about obviously the Spring and Summer lines are very strong, and the consumer's reacting to it, but I wouldn't want to draw any conclusions of the economy in Europe overall.

Great, thanks very much.

Good luck.

We'll go next to Adrianne Shapira at Goldman Sachs.

Thank you.

Manny, when you initially provided guidance in January of this year, it seems as if what has changed since then, besides the fact that obviously, we're starting off with a strong feed and you're passing that on.

On one hand, the world has gotten a bit scary, but on the other, it seems like you've taken out risk to your guidance especially with the Calvin Klein business now planned at contractual minimums.

So maybe in terms of where we sit today versus where your head was at in January, when you provided the initial guidance.

How you feel about the remainder of the year, especially with the back half being better than the first.

Sure, well look.

Let's put it in perspective.

When we first came out in January, we said the first half would be flat to down and right now, the first quarter was up, earnings per share 6% and the second quarter we're guiding now to a 10% to 12% increase so clearly what's in front of us we feel really good about, and that's enabled us to do a couple of things.

Its enabled us to take some of the risk out of the Calvin Klein royalty business by taking future royalty in Europe down, and also at the time we were looking at a euro that was $1.30 and now we're projecting something more like $1.27 to $1.26.

So clearly we factored that into it as well, and took those EPS hits while raising guidance from January up, probably $0.15.

So, feel much better about the tone of business right now but just don't have a crystal ball to tell you how everything is going to actually come together in the macro environment.

Great, okay so in light of the Q1 6%, Q2 10% to 12%, we should still be thinking about the back half better than the first half, even though you had thought it was going to be flat to down.

That still holds true, that the back half still presents an opportunity?

Yes, just the math.

I don't have it in front of me but the earnings per share growth in the back half of the year is well in excess of 15%, when you put it all together.

Since we're growing at the top end of the guidance 16%, so clearly, I don't have the math in front of me.

You guys can do your own, but based on our guidance, we're looking for even a stronger second half.

I think two things will fuel that.

Overall, just a natural flow through of the cost declines that are in the system, have been ordered, booked and are in place.

We should really -- we're feeling more and more confident about Heritage getting back on to its track of delivering steady earnings, 9 out of the last 10 years.

So, with the exception of the blip that we had last year with Heritage, with all of the chaos in the market, we really feel strongly that business gets back on track second half of the year.

Then Manny, just following on that, it's exciting to hear that you see opportunity for Heritage to get back on track but on the flip side, we're obviously seeing some pretty -- strain out of JCPenney with comps down 19% in Q1.

Maybe help us think about how you're getting more excited about Heritage but we're seeing challenges as JCPenney tries to transform.

Overall on the Heritage side, we sell everyone, so I think that's important to take into consideration.

On the Heritage side also, the key in the Penney's situation from an operating point of view I think is to make sure your inventories continue to be on plan.

Now everybody was surprised, business was softer in the first quarter through Penney's.

We've adjusted all of our inventories and our flow and our order book to really take that into consideration.

One of the advantages we have going on is we have two new brands at JCPenney.

We have one new brand at JCPenney that didn't exist, which is the Arrow business which is growth against last year.

In addition, the IZOD business, which is in the same number of doors, but is getting a stronger presentation and a deeper buy is very positive for us as well.

So all those businesses at Penney's, as tough as the Penney's business has been -- our Van Heusen, our Arrow and our IZOD business for the first quarter were right on plan against our projections.

Our inventory is in line, and we've just adjusted the inventory flow and the inventory purchasing for the back end of the year so that's what's happening there.

Offsetting whatever chaos that Penney's is creating in the market, is just very strong business with Macy's, with our Heritage Brands, and very strong businesses at Kohl's with our businesses there as well, both sportswear and dress shirts.

So, that flow is really coming back, and the order flow seems to be in place for us.

Perfect.

Best of luck.

We'll go next to Omar Saad at ISI Group.

We've been hearing some rumbling about in Europe that some department stores are getting a little bit more cautious in terms of their planning, given all of the macro and headline stuff that you mentioned.

Are you guys seeing department stores look to maybe cut orders a little bit just to manage inventories a little bit more tightly, and how do you feel overall about the inventory levels in your business and at retail in Europe?

Okay, we're not seeing with any of the major accounts, any cancellations at all on the Tommy business.

For Fall and Holiday, as you can see in the Open-To-Buy, our sales order flow and our order book, we're planning the business at 4% to 5% based on the order flow.

So clearly based on five or six consecutive seasons since we've been operating the business of double-digit growth, Open-To-Buy dollars has shrunk second half of the year.

Retailers getting their inventories back in line.

That's all factored into our 4% to 5% growth in the wholesale business for the second half of the year.

We're not seeing attempt by the retailers to cancel goods at this point.

We believe Tommy, unlike most of the brands in Europe, continues to gain market share in this environment and has been a proven performer at retail with our key customers.

So, they continue to get behind that brand, and we haven't seen any softness in that business at all.

Whatever orders that we have cancelled, that's been more our decision from a credit point of view with some of our smaller specialty store accounts, But clearly, immaterial to the overall business and feeling good about how the business seems to be progressing.

Got you, thanks, that's really helpful.

If you step back and think about the success you guys are having with that brand and the Management team has been excellent, and the execution has been great.

We were starting to hear other brands over there comping down, comping down mid-teens, even in Northern Europe.

It's not necessarily just the Southern Europe, Northern Europe split.

Stepping back and you think about that business, how could you explain, what's your explanation of why it's doing so well?

Is it just execution?

Is there a fashion trend in Europe where they have that Tommy Hilfiger, preppie, red, white and blue is in fashion right now?

What are your thoughts on that?

Thanks.

Look, this is one of those things that you can never really put your thumb on, exactly why we're outperforming but clearly executions a big part of it.

I think the Management's team for localization, focusing on each market from a merchandising point of view, product assortment point of view.

Really staying on top of it, from that point of view I think its always been a strength and continues to be a strength of the Tommy brand.

I think to some degree we are in a preppie traditional, very much color focus, from a brand point of view.

I think that does benefit the Tommy brand to a degree, but again we're up against a lot of competitors that fill that bill as well, and gaining market share.

So, I really believe it comes out to execution and product assortment.

I think the intensification of the marketing that's been going on for the last 24 months has really been a key, both in Europe and in the United States from that point of view.

So, I think that's the best I can do from an explanation, and just monitoring the business and not seeing any slowdown in it at this point.

Okay, that works for me, Manny.

Thanks a lot, great job.

We'll go next to Evren Kopelman at Wells Fargo.

Your North America Outlet business seems to really have out sized growth ahead of your other channels.

Can you talk about the reasons behind that, and also how is the profitability in that channel relative to your other channels?

Sure.

I guess look, I think where we're seeing most outstanding growth is with Calvin and Tommy.

Our Heritage Brands are doing fine low single-digit comp increases, which are on plan delivering I think the Outlet channel, that channel in general is a robust channel.

I think there is a significant international tourist component to that in key markets -- Florida, Vegas, the New York metro market, the West Coast.

I think we benefit dramatically from that both with Calvin and Tommy.

We have not seen any slowdown in that tourist inflow at all.

So business is, both from a domestic tourist flow, which I think only intensifies in the Summer, and from an international tourist really adding to the business.

Our biggest international tourist for most of those key markets continues to be Brazil and both the Tommy brand and the Calvin brand are extraordinarily strong in the Brazilian market, and when they come here, they shop significantly in that channel of distribution.

So, I think those are some of the reasons why we're doing as well as we are.

I think the last reason is, we've also really focused in on some key markets, expanded stores in those markets to take advantage of the growth that we're seeing, and have been able to really capture more market share because of that.

How is the profitability?

I'm sorry.

The profitability in our Tommy and Calvin businesses are one of the highest in our franchise, so it's somewhere in the 11% to 13% range.

Thank you.

We'll go next to Howard Tubin at RBC Capital Markets.

Great quarter.

Maybe just some more color on inventories.

How you feel about carryover in your inventory, if there is any, and how you're planning inventory for the Fall season?

Yes, I think inventories are in terrific shape in house and also, best as we can tell, we monitored weekly at retail with our key department store accounts.

We really jumped on the Fall holiday inventory, mid fourth quarter to really keep ourselves well balanced.

So, I feel like we're, I guess on two levels we're in excellent position.

We're in an excellent position from our quality point of view -- from a quantity point of view, and being able to stay out of trouble on seasonal goods.

But we're also very liquid and have been chasing -- and I feel confident that as sales hopefully materialize above all plan, that we would be in a position to capture that.

So, I think we've really been able to balance that, particularly in some of our quick response and our EDI businesses, dress shirts, and in particular neck wear, we've been able to be very liquid and stay on top of that in order to drive that business, so I think that will continue.

Great, thanks.

(Operator Instructions) We'll go next to Robbie Ohmes at Bank of America-Merrill Lynch.

Two questions for you.

The first question was just the strength of the AUR, the Tommy Hilfiger AUR up 10%.

Can you walk us through the timing of when the AUR tailwind began and when you anniversary that in?

Does that mean if I look at Tommy's comps in North America up 12%, that 10 points of that is AUR?

If so, how you're thinking about AUR in I think the Fall season, I think you start to lap that.

Then the second question on Heritage.

So IZOD, I think you're doing the shop-in-shops with JCPenney and you mentioned Arrow going into JCPenney.

I remember historically there was a desire for some exclusivity from Macy's versus Kohl's and Penney's, and Kohl's versus Penney's and it sounds like Arrow and IZOD are broadening distribution and being less exclusive.

Can you walk me through what's changing there with your partners?

Thanks.

Sure.

Let me -- I guess there's a couple of questions there.

On the Tommy, we've experienced AUR improvement in Tommy and Calvin, really starting in the last year, so we are, we've already anniversaried some of that.

Last year's AUR increases first half of the year were close to 4% or 5%, that was in Spring and Summer.

When we moved to Fall Holiday it went to high single-digits and now we're seeing about a 10% increase, and I think that's driven but a couple of things.

We're looking at like-to-like products so mix plays into this, so it's not just everything.

It's not just that overall everything is 10% but when we look at like-to-like product, we're seeing 10% out the door retail increases.

So, it really is being driven by a combination of a couple of things.

AUR is a key component.

It's not quite as the percentage that you described, but it's probably 50% of the increases being driven by AUR and 50% of the increase is being driven by newness, conversion, some of the other metrics at retail.

On the exclusivity question, for some of our Heritage Brands, first let me take it in pieces.

Arrow is basically a Kohl's, JCPenney brand.

It's not at Macy's at all.

The IZOD brand is at JCPenney.

It has historically always been at JCPenney.

It has been there since our acquisition back in 1993.

It has always been the halo brand for JCPenney.

I think what hurt that business is when American Living went into that business and attempted to be the halo brand.

Then couldn't transact at the prices that IZOD transacted at and was selling in all reality 50% below the IZOD price point.

That basically took a big piece of that business and that business began to shrink.

With a new management team at JCPenney, they've really taken a different focus, taking the American Living brand out of Penney's and have really focused in on IZOD as the halo preppie traditional brand at the store.

For Macy's, we are a main floor brand.

We compete with Levis and some of their private label so it's a somewhat different strategy at Macy's.

It's more of a category business as opposed to a lifestyle business, and it's based on historical performance, Macy's has continued to have the IZOD business on the men's side of the floor in a big way, where Penney's is at it across multiple categories.

So, that's the best I can give you a sense of it and we believe that distribution will continue because the brand works within the strategies of both of those retailers.

No, that's really helpful and just really quickly, Manny.

So, a lot of your confidence in the turnaround in Heritage, it sounds like you're picking up the American Living business in your Fall shipments into JCPenney.

So, I assume JCPenney is going to be, on a year-over-year basis your strongest Heritage wholesale customer in the back half; is that right?

No.

Macy's will still be larger than JCPenney -- overall the Macy's and the IZOD business.

The IZOD business will be a strong business at Penney's, and it will grow as it performs and gets to a certain level.

The improvement in Heritage is all about gross margin, and it's all about the significant clearance and promotional activity that went on in the third and fourth quarter last year.

Our margins in the third and fourth quarter combined were down between 400 basis points and 500 basis points.

We are anticipating getting half of that back.

We could do better than that, and we're in a strong position to really do that, so it's much more margin than it is sales.

Got it.

Thanks so much, Manny.

We'll go next to Jeff Klinefelter at Piper Jaffrey.

Manny, I was just curious if you could share a little bit of perspective on comparing and contrasting the Calvin Klein business in Europe, the Tommy business in Europe.

Clearly there are more challenges in the apparel side for the Warnaco Calvin Klein business, and do you see that as regional, more exposure to the South?

Are there issues in pricing, product, maybe just a little bit more context around that given the relative out performance for Tommy, and also that very strong op income growth in Tommy in the first quarter and your success in driving marketing dollars to that brand.

Maybe a little bit more color on what your expectations are for profitability in Tommy for the year?

Sure.

I guess I'm going to give the second part of that question to Mike.

I'll deal with the first part about the comparison between Calvin Europe and Tommy Europe.

I think you hit on one of the key factors.

One of the key factors is the strength of the Calvin business has historically been Southern Europe.

Where the Tommy business, Southern Europe, Spain and Italy represent probably 20% to 25% of the business, where it represents 65% of the Calvin business.

So I think we'll have the brands developed.

Tommy is much more geographically balanced than Calvin, particularly on the apparel side of the equation.

I think the real issue we're having in Calvin in Europe, if you really focus on the product category, is really on the apparel side.

It's really the sportswear and bridge apparel, which hasn't been successful since its launch.

The jeans business, which Warnaco talked about in great length and I'm not going to speak for them.

But clearly they are putting initiatives in place that mirrors some of our design focus.

How they're focused on design, how they're centralizing it, at the same time trying to localize it to get a benefit out of that.

We applaud all those initiatives.

We think they will start to pay dividends in 2013, probably not going to be able to see that much in the business this year, given lead times and cycles.

So, I think those are really some of the key drivers that are going on.

We would like to see better presentation of product, and we would like to see a better product offering but I think the regional focus on the Calvin business versus the Tommy business is the biggest change.

Then I'll just make Mike put a little bit of color on the Tommy profitability for the balance of the year.

Manny really talked about it but just in general, operating margins for the first quarter were down about 125 basis points.

As we look to the second quarter they're flat.

For the year they're up about 60 to 70 basis points, so obviously, the bulk of our improvement for the Company is coming in the second half of the year as we've talked about.

Driving that in particular, are gross margin and costs.

So as we look to Tommy, they will also have a significant improvement in the second half due to that product, the cost of product decreases and the gross margin improvements.

I guess, Jeff if you're asking where do we see the Tommy business.

Look, we see the Tommy profitability somewhere between 12.5% and 13% operating margins for the year.

Then directionally looking out, we really think those operating margins start to move between 13% to 14%, 2013 and beyond.

So, I think just getting that cost dynamic back in balance and taking advantage of the growth that we're seeing and leveraging the SG&A line, I think will drive the overall profitability.

Thank you.

That's helpful, Manny.

One other follow-up on the Tommy business.

Given this unprecedented volatility, and as you said, headline risk to confidence.

What is your Management team, the Tommy Management team in particular.

Any changes in how they're approaching the wholesale customers -- the utilizing systems to maintain a visibility into the booking profile?

Just curious how these Management teams are attempting deal with this uncertainty.

I guess a couple things.

I think we're constantly investing on the supply chain, and focusing on getting good data from our retailers in both North America and internationally, and I think that continues.

I think those things are ongoing, but I think it's also how you manage the business intuitively.

I think when we were in a cycle, where the brand was growing and had an order book that was flowing at 12% to 15% increases.

Feeling that there was so much momentum in the business, we were being more aggressive on our inventory buys and really feeding it.

So, if you had an order book that was 100%, you might be buying 110% of that inventory, with the strong belief that you'd be able to sell in-season and really manage the business.

In the environment we're in now, I think we're very cautious about that, so if we have orders that are 100%, again I think we're buying something closer to 98% right now.

Really not, the risk reward is just not there to go chasing business that may or may not materialize.

If it doesn't materialize, you could be left with inventory that really could create risk for you.

So, the visibility in that European wholesale business is much greater than the US visibility.

Just by the nature of how retail is done there, orders are given, orders stick, you don't have the cancellation issues that you do in the United States.

It's just a more easily-managed business from that perspective.

Given that visibility, we're being very cautious on the inventory buy not to get ourselves in trouble with excess inventory at the end of the season.

So just a mind set about how to manage that inventory going forward.

Thank you very much.

That's very helpful.

We'll go next to David Weiner at Deutsche Bank.

So just was wondering if you could maybe give a little bit of an update on your plans in China.

You did go through some of the numbers in Asia for the quarter, but I mean I guess any update there in terms of how you're planning for that business for the back half of the year and into 2013?

I guess on the Calvin Klein China business.

The business continues to be very strong, and we continue to make investments in square footage there, strong jeans and underwear business, very strong CK bridge business, and strong accessories fragrance business as well.

So, really haven't seen anything to slow us down in China, from a royalty point of view on Calvin.

On Tommy, the business is significantly smaller than the overall Calvin brand, but it's growing dramatically.

We are really now operating -- we've been operating the business as a joint venture for the last nine months now.

For the first time, I think we're actually breaking out the joint venture income and you'll be able to track that as we go forward, so that business is very healthy.

We're seeing 15% to 20% growth in that business that we're projecting for the year.

It's actually stronger than that, haven't flowed it through yet.

We continue to, just to remind everyone.

We continue to collect royalties like a normal licensing relationship and then we own 45% of the China business, so that growth continues to happen.

It's a franchise distributor model, we'll operate -- the joint venture will operate some owned flagship stores.

Basically selling more of a wholesale model into partners and it seems like a very good model for us.

It's off to a very strong start and that infrastructure is being built.

The investments are being made, and that's all included in the joint venture income that you see reported in our numbers.

Is the -- on the Tommy side in China, is the product -- I mean are there any major differences in how the product looks there?

Like for local tastes and things like that, or is it pretty similar to what you'd see otherwise in other countries?

I think if you go to every one of our key markets there's always a localization from a merchandising point of view that takes place, sizing and all of the issues that go on with that.

So clearly that goes on, local purchases will go on for the percentage of the business.

But if you walk into those stores and if we're doing our job right, and I think we are right now.

If you go into those stores those stores should look very much like our European stores and we positioned at a premium level there.

There should be a consistency, globally, how the Tommy brand is positioned.

So, localization from a merchandising point of view, but the brand DNA stands always as a key focus point.

Great.

That's very helpful.

So we're executing really well against that.

Great.

Just last question, how many stores roughly do you have in China or run in China?

Operated directly, a handful and points of sale I think right now, we're just under 100.

Somewhere in that area.

Okay, perfect.

Thanks very much.

We'll go next to Carla Casella at JPMorgan.

I was wondering if you could talk a bit more on the jeans business, on the weakness.

Is it that you were losing distribution or losing share, or do you think we could be seeing a slowdown in the denim cycle?

Carla, I think on the specificity of some of the Calvin Klein jeans business.

I think some of these questions should just go to Warnaco.

I think they've been raised ad nauseum with them, so I'll defer on that side.

I will say that the jeans, we've been in a 12 month jeans cycle that has been tough, but we are now starting to anniversary that, and we're starting to see growth in North America on the jeans side of the business.

We're starting internationally, where we should start to see some growth in that business as well.

A lot of initiatives going on, on the Calvin side with colored denim, and I think a lot of those have worked very well, but at this point -- especially for Spring.

There's still too small a piece of the overall jeans business to change the direction of what's gone on there.

So, I can't give much more color than that, and you really need to speak to Warnaco.

That's great.

One follow-up on the acquisition front.

Can you just talk about your views of diversifying into more women's, to balance the assortment more, or would you prefer on the acquisition front to look at men's business?

How important is an international component when you're looking at acquisition opportunities?

At this point in time, it's less about women's and it's more about whatever we decide to get involved in, the strength of the brand.

We really, our choice would be a brand that is both men's and women's-focused.

Our choice would be, depending on the expertise that comes with the brand and the potential acquisition.

It will be determination whether we run a women's business ourselves or license it out in the Tommy business, because of the expertise we have and how its been developed.

We directly operate most of the women's business we're in.

On the Calvin side, where the brand has grown from a licensing model, we obviously operate -- we don't operate any of those business, and we use a licensing model.

So I think it will depend on the circumstances from that point of view.

Our first choice from an acquisition component will be to continue to do more Calvin and more Tommy, and grow those franchises either by product categories like we're doing in Europe with the sportswear businesses there.

What we're doing with Tommy, taking back tailored clothing, dress shirts and neckwear in Europe and Asia to run those in-house directly for 2013.

Those are 2013 and 2014 initiatives but clearly they will be big growth drivers for us as we go forward, so I think that would be our first priority, more Calvin and more Tommy.

Okay, great.

Thanks a lot.

We'll take our next question from John Kernan at Cowen.

I went back in September of 2010 at your Analyst Day in Amsterdam for Tommy Hilfiger.

You laid out some pretty ambitious door-growth plans, both in the wholesale side of things and in the owned retail.

Where are we in that cycle?

What type of door-growth year-over-year in each of those businesses are we looking at going forward?

Okay, based on anything that we presented in September 2010, we are dramatically ahead of plans.

We've clearly opened internationally, significantly more retail stores and flagship stores.

We opened the large London store, Tokyo, a second in Osaka.

We've opened a new store in Paris on Champs-Elysees, a new Hamburg store in Germany.

So, those are just examples of not only opening stores but also opening stores that are profitable.

At the same time, significantly brand enhanced, and giving the global appeal.

Our plan from the store opening point of view is globally for the Tommy brand, is probably owned and operated stores, to add between 50 and 60 stores a year in North America and the rest of the world.

Then probably another 25 to 30 franchise partner stores around the world.

For Calvin, we're adding in excess of 150,000 square feet a year.

We probably will add in excess of 100 stores doors internationally, with significant focus on Asia.

China being the biggest market there, but also Korea with our sportswear, with our CK business.

Then Southeast -- South America, Latin America, Brazil being a real focal point, continuing to open square footage throughout Latin America.

So that gives you a sense of the two big brands and the growth we're looking for, and clearly it's accelerated over the last two years.

Great, that's helpful and then the Tommy Hilfiger flagships in Japan that you announced.

Tommy has been in Japan for a long time, in that market.

What do you see the long term potential for Tommy?

Well that business is about a $275 million business, depending on currency bouncing around, but about a $275 million business.

10% operating margin business.

The brand position there, we are really in an elevation mode of the last two years of continuing to try to lift the brand presentation.

It became much more of a jean/Tommy, a little bit too urban brand for us in Japan, really the only market outside the states that really had that issue.

We have been really on a mission there to upgrade our positioning there, and are really focused in on the Tommy sportswear, men's and women's product as the anchor.

Have opened as I said the flagship store in Tokyo, one in Osaka and continue to open full price stores, to lift the perceptions of brand there.

We don't view, in all of our growth models, we don't view Japan as a huge market.

We believe that the brand could be twice its size, but our financial plans call for it to continue to grow in the low single-digit range, with the economy in Japan.

But clearly, there's an opportunity if we breakthrough to really get some momentum and acceleration.

Typically, what we're seeing in the United States where we never would have planned double-digit growth, and that's what we've been experiencing in the last 27 months.

Okay, great.

Thanks and good luck.

Okay, Operator.

We're supposed to be at another Investor meeting so we'll take one more question and then end the call.

Okay, that question comes from [Chris Shimbus] at Credit Suisse.

I was wondering if you could provide some perspective on the game plan and timing for the bridge business in Europe?

An update there would be very helpful.

Sure.

We are still in a lot of discussions, a lot of planning with our retail partners.

The plan right now is to launch with men's for Fall 2013.

We are working very closely with the key department store accounts in our largest markets in Europe right now.

So, the plan is to launch in men's, probably 12 months later, to follow that with women's.

It will be apparel and accessories, and I think we'll have a lot more to talk about in the next three months to six months, then we really put flesh on it for you.

We've sized the market, and it's just a guesstimate over the next five years that we really believe it's a $500 million business for us long term.

Men's and women's, sportswear, apparel and accessories there.

So, I guess at this moment in time, it's about as far as I'm willing to go with talking about the positioning of brand, how we're going to market it.

We'll clearly give a lot of color on transparency on that as we get to the Fall of this year, but be assured that start up costs are all accounted for.

We have everything placed in our guidance and our budget, and we feel confident about it that we have what we need and the resources, both financial and people-wise to really make this a success in Europe.

With that, we're going to end today's call.

We really appreciate your attention.

We look forward to our second quarter call and I guess I'd be remiss if I didn't mention Allen Sirkin.

Allen Sirkin is our President and Chief Operating Officer.

I know all of you know him.

Allen will officially be retiring on June 21 at our Annual Meeting.

We'll have some nice things to say about him then.

But just with this group, that I know has had a lot of interaction with Allen.

We all wish him all the good luck in the world in this new phase of his life, and congratulations.

So with that, thank you for your attention, and we'll see you in August.

Take care, bye-bye.

That does conclude today's conference.

Again, thank you for your participation.