PVH Corp (PVH) 2012 Q2 法說會逐字稿

Good day, everyone, and welcome to today's PVH Corp.

second-quarter 2012 earnings conference call.

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

and consists of copyrighted material.

It may not be recorded, rebroadcast or otherwise used without PVH's express written permission.

Your participation in the question and answer session constitutes your consent to having any comments or statements you appear on any transcript or broadcast of this call.

The information made available on this webcast and conference call contains forward-looking statements that reflect PVH's view as of August 27, 2012 of future events and financial performance.

These statements are subject to risks and uncertainties indicated 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, epidemics, war, terrorism, availability of raw materials and other factors; its reliance on the sale of its business partners 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.

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.

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

On the call with us today is Mr. Manny Chirico, Chairman and CEO.

Please go ahead, sir.

Thank you, Dana.

Joining me on the call today is Mike Shaffer, our Chief Financial Officer; Dana Perlman, our Treasurer and Head of Investor Relationships, and Ken Duane, CEO and runs all of our wholesale businesses in North America.

In general we are very pleased with the results for the quarter.

Just to summarize, we beat our top end of second quarter earnings guidance by about $0.05.

And given the momentum we have seen in our business we have also increased the top end of our 2012 earnings guidance by $0.07 for the year to $6.25 to $6.32.

Getting into our major businesses, I am going to start with the Tommy Hilfiger business.

The Tommy Hilfiger business continued its strong performance during the quarter posting a 4% revenue increase and a 28% increase in operating income.

When you take out the foreign currency headwinds our operating performance was outstanding on a constant currency basis.

Revenues were up 10% and operating income was up over 34% for the quarter.

Let me focus on the international business of Tommy, revenues internationally were up 9% in local currency.

Our retail comps in Europe posted a 15% increase for the quarter while wholesale revenues were up 9%.

Geographically we continue to see strong growth in Central and Northern Europe with particular strength in France, Germany and Turkey, partially offset by softness in Southern European markets with particular focus on Spain and Italy.

Moving to North America where we posted an 11% revenue increase for the quarter, that was driven by an 11% comp store increase in our retail business and high single-digit growth in our wholesale businesses.

We continue to see momentum in North America and strongly believe that the significant investments we are making in product and in our marketing programs are paying dividends for us.

We have seen average unit retails increase about 10% over the last 12 months at both wholesale and retail.

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

We strongly feel that our in-store presentations and product initiatives will be fully in place in the second half of this year and we believe we are well positioned to continue to exceed our plans in North America 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 for the balance of the year more conservatively than current trends would indicate.

Moving to Calvin Klein, the Calvin Klein business continues to exceed our financial guidance and post strong results.

Total revenues in the second quarter for our combined Calvin Klein businesses were up 5% despite overall softness in the global jeans and women's underwear businesses.

This increase was driven by our Calvin Klein North American retail business which posted a 5% comp store increase.

For the year we are planning our total North American Calvin Klein wholesale and retail businesses to grow about 10%.

This will be driven by a mid-single-digit comp store increase and growth in square footage at both wholesale and retail.

Moving to our licensing segment, royalty revenues are up 6% on a constant currency basis, this increase was driven by strong performance globally in fragrance, women's sportswear, dresses, men's and women's footwear and handbags and accessories, all of which posted double-digit sales increases.

This positive performance and was negatively impacted by a 10% decline in Warnaco's global Calvin Klein sales.

The licensing of the business posted strong revenue increases across all geographic regions with the exception of Europe.

Specifically by region, North America sales were up 5% with all product categories posting strong results with the exception of jeans and women's underwear.

In Asia sales were up 6% driven by double-digit growth in China, Hong Kong and India and partially offset by weak sales in Korea.

Latin and South America sales were up 25% driven by the Brazilian market which continued to post above 30% increases.

In Europe sales overall were down 12%, principally related to the poor performance of the Warnaco apparel and underwear businesses.

Let me put some color on some of our biggest licensed businesses starting with jeans and underwear.

As I mentioned, the overall business is down about 10% on a constant currency basis in the second quarter, continued -- that is being driven by continued weak performance in jeans and women's underwear.

On a regional basis looking at those businesses we saw strong case sales in Asia and South America which were more than offset by the poor sales with jeans and underwear in North America and Europe.

Moving to fragrance, 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 launch of CK One in the Spring.

Despite that timing issue fragrance sales were up 11% for the quarter and well ahead of projections.

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

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

The first is a new men's fragrance called Encounter, which is just beginning to ship to key accounts throughout North America and the rest of the world.

And the second is a new global marketing and advertising campaign for Euphoria, our largest fragrance franchise.

The Euphoria marketing campaign will begin in October and intensify in the all important holiday selling season.

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

Moving to women's apparel, our North American US women's apparel and footwear businesses were very strong this quarter.

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

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

In addition, on the footwear side of the house we are seeing strong performance in men's as well as in women's.

Moving to handbags and accessories, that business continues its strong performance.

G-III has seen excellent sell-throughs at department store accounts; we are targeting a 25% growth for these product categories in 2012 and are on track to exceed that.

Our ck brief business in Asia continues to grow posting a 10% increase in revenues for the quarter.

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

The growth is being driven by China, Hong Kong and the Indian market where we experience significant door expansion and comp store sales growth.

For 2012, as we previously discussed with you, we are planning our Calvin Klein royalty revenue growth more conservatively than in prior years due to the uncertainty in Europe and the weakness we see in our global jeans business.

In order to take the financial risk out of our guidance we are currently projecting all of the European jeanswear and apparel businesses that want to go operate at contractual minimums for fiscal 2012.

As such our ck European royalties are being planned down about 10% for the balance of 2012.

Overall we continue to plan royalty revenues on a consolidated basis -- on a constant currency basis to grow about 3% to 4% for the year.

Moving on to our heritage business, excluding the impact of the exited businesses, IZOD women's and Timberland, ongoing revenues for the heritage business decreased 6%.

Comp store sales in heritage retail businesses were relatively flat while our ongoing wholesale businesses experienced a 10% sales decline due entirely to a reduction in dress furnishing sales to J.C. Penney.

Given the overall weak second-quarter performance at J.C. Penney and a significant decline in customer traffic, our replenishment EDI businesses, particularly dress shirts and ties, which are driven by customer traffic, have been negatively impacted.

We have right sized all the inventories levels at J.C. Penney and readjusted our sales estimates for the balance of the year.

All of this is factored into our plans and our guidance.

Clearly the heritage business is in the midst of a major turnaround.

We are very confident and we feel we are very well-positioned in this business for the balance of the year.

Our fall orders are on plan, inventory levels are in line with retail sales plans, our average unit retails are currently up 5% to 7%, second-half product costs are decreasing 5% to 7% and our in shop store presentations are being enhanced and expanded with key customers.

The IZOD J.C. Penney shop openings are on target to open the first week of September.

All of this gives us a high degree of confidence that we will see a dramatic improvement in this business beginning in the third quarter of 2012.

To give you a sense of some of third-quarter trends that we are seeing in the first month of August, again the Calvin Klein and Tommy businesses are off to a very strong performance and continue to outperform our guidance.

Comps in our Calvin and Tommy Hilfiger business are running up 8% to 9% against a mid-single-digit comp plan.

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

And wholesale in the United States, both Calvin Klein and Tommy continue to perform ahead of sales plans and we continue to see increases in our out the door retails.

Our heritage business is well-positioned for its financial turnaround and we feel we are well on target with J.C. Penney to implement all the shops the first week of September.

Moving to Europe, our Tommy retail business in Europe, we are seeing comps in Europe that continue to post low teens increases against a 5% comp store plan, so very strong performance continues at retail in Europe.

Our Tommy wholesale business, which represents 70% of the total Tommy business in Europe, continues its strong momentum.

For the fall holiday 2012 season our order book is up 4% to 5% and our fall shipments are running on time.

We are seeing no indication of slowdown or cancellation within any major European customers and feel very good about our current European sell-throughs.

The fall selling season is off to a strong start.

Given our strong European sales trends we clearly are continuing to grow market share in all key countries.

Looking out to Spring 2013, our order book is not complete, but would indicate a wholesale sales increase for the first half of the year of 4% to 5%.

Looking at our -- finally, looking at our guidance, we have been very prudent with our estimates.

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

We feel we have 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 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.

With that I will turn it over to Mike to quantify some more of these results.

Thanks, Manny.

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

We are very happy with the second quarter results.

For the second quarter we met our revenue guidance and delivered earnings per share of $1.25 which was $0.05 above the top end of our guidance and 17% greater than the prior year.

Our $0.05 earnings per share guidance (technical difficulty) reflected an EBIT improvement of $0.03 and taxes and interest improvement of $0.02.

Our total revenues, while relatively flat to the prior year, were negatively impacted by currency translation and discontinued businesses.

Excluding these items our revenues were up 4% to last year.

Our Tommy Hilfiger revenues, which were ahead of guidance, were strong in both Europe and North America.

On a constant currency basis Tommy Hilfiger revenues were up 10%.

Our Calvin Klein revenues for the quarter were plus 5% to last year, slightly better than our guidance.

Moving to our guidance for 2012, we've raised our full-year earnings per share guidance to a range of $6.25 to $6.32, or an increase of 16% to 17% over the prior year.

We've raised the top end of our full-year earnings per share guidance for our $0.05 second quarter [beat], plus an additional $0.02 for the second half.

Revenues for the year 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%.

Total Tommy Hilfiger revenues are planned to be up 7% to 8% on a constant currency basis with Tommy Hilfiger North America increased 7% to 8% and Tommy Hilfiger International increasing 7% to 8% 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 our exiting Timberland and IZOD women's businesses.

Our total heritage revenues are planned to decline 4% to 5% including the negative impact of 6% related to exited businesses.

Gross margin for the year is planned up about 150 basis points with expenses for the year planned up about 80 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 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 should tax 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.

For the third quarter of 2012 earnings per share is planned at $2.20 to $2.25 or an increase of 16% to 19% over the prior year.

We are planning our revenues to increase about 3% to 4% to the prior year excluding the impact of foreign exchange and exited businesses.

Including the impact of foreign exchange and exited businesses we are planning our revenues down about 2% to 3%.

Our gross margins for the third quarter will be up about 250 to 275 basis points, all businesses are planning to show gross margin improvement as we sell fall products to show cost decreases of about 5% to 7%.

Overall operating margins for the third quarter are planned up about 150 basis points influenced by mix of business and gross margin improvement.

Tax rate for the third quarter is planned at 23% to 23.5%.

And lastly, we're continuing to project term loan repayments for full-year 2012 of about $300 million.

This will bring our total term loan repayment since the date of the Tommy Hilfiger acquisition to about $1 billion.

And with that we will open it up to questions.

(Operator Instructions).

Bob Drbul, Barclays Capital.

(Technical difficulty) on for Bob today.

So I guess starting off, when you look at the European business for Tommy in this very sort of strong comp trend quarter to date and last quarter also, what do you think drove that lift in that comp acceleration throughout the quarter?

I guess what I would say is compared to this time last year we're in a significantly better inventory position.

Last year we were chasing business constantly throughout the year.

There was very little spring/summer to clear at all last year, so we had more spring/summer goods as we positioned ourselves based on the strong sales trends that have been going on in Europe for the last 15 to 18 months.

So we have actually bought into that sales plan, so we take advantage of that.

And we have also seen just very strong initial sellings of fall product as we have come out of the gate.

So we are really seeing it come together.

Like everything else product is key.

I think from all indications from the market the fall product assortment has been very well received.

Consumers are really reacting strongly to it and we are seeing strong sell-throughs both at department store accounts and in our own retail stores.

So I think clearly it is the product that is driving the business.

And then in terms of the China business and the China JV, what have you seen over there in terms of performance and the brand positioning specifically?

And then are there any sort of updated plans around taking direct control of that business?

Well, I think we are -- we are a few years away from that.

Clearly China is a big opportunity for Tommy; sales this year will be somewhere in the neighborhood of $75 million, which is well ahead of where we projected it to be.

We are seeing strong double-digit sales growth there, continued improvement in profitability there.

And we are running well ahead of our projection there, but we are still very early.

And any thoughts of bringing it in-house at this point are premature.

I think we are still looking at somewhere between two to four years from now as that business matures and develops.

Okay, great.

Thank you.

David Glick, Buckingham Research Group.

Manny, just wanted to touch a little bit on Hilfiger and Calvin Klein.

Clearly the Tommy Hilfiger acquisition has created significant value for your shareholders.

I was wondering if you could kind of walk us through what you guys did right and maybe some things you did wrong in terms of how you managed that acquisition and the transition, which is obviously reflected in the results you are seeing.

And then secondly, can you sustain this double-digit growth in Tommy going forward?

And can you get Calvin Klein back to double-digit growth?

I'm not asking you to preview your Investor Day, but if you could kind of give us some outlines here that would be helpful.

Okay, Dave, I will try to put a little bit of color on.

From the acquisition point of view I think is -- the best thing we did is we allowed the Tommy management teams in Europe and North America to really operate their businesses and run their businesses.

We saw the growth potential of the Tommy business and we saw the operating platform that existed and we were able to really get behind it and invest in the marketing of the brand, which was under invested in the -- I think under its ownership with private equity ownership.

So clearly we have added about 100 to 120 basis points of additional marketing, which we think has really helped us gain more market share, increase our AURs and in North America raise the perception of the brand as we continue to get better shelf space at Macy's, shop exposure at Macy's and lift the marketing of the overall perception of the overall brand.

What we have done -- on the flip side of that -- look, there is always things you can do better.

But I think on balance I am really happy the way we have come together, the way we have integrated the back office.

If we can execute at this level, all of our acquisitions in the future, I would be very happy with that kind of performance.

I think the Calvin business is really hitting on just about every cylinder and a key for us is really to get the Calvin jeans business back on track, both in North America and in Europe in particular.

To get back to double-digit growth when you have that big a business that has been under such pressure, and I think Warnaco has talked about all of their initiatives.

Clearly I think the topline growth will come but I think it is really a second half of next year issue with some of the great design talent that they've brought in, the investments they are making in their infrastructure and merchandising.

But given pipelines and replenishment I'm sure they are making some changes for spring of this year and got some positive reads on some business.

But really I think the benefits we will really start to see beginning next year.

So we continue to be -- we look at our business model, we look at how we would continue to see the three businesses moving forward.

There is no reason that we feel that we wouldn't be able to continue to grow something in the range on a long-term basis next three to four years at a 15% compounded annual growth rate our earnings per share.

So no reason to back off of that now and more to come at our Analyst Day in October in Europe.

Okay, great.

Thanks for the color.

Good luck.

Adrianne Shapira, Goldman Sachs.

Manny, congratulations on another great quarter.

I'm just wondering, you touched the customer at a lot of different distribution points, across retail, wholesale and outlet, a lot of geographies and also demographics.

I'm just wondering -- perhaps give us your assessment of what you are seeing in terms of consumer spending, appetite for this back-to-school season and as you think about the holiday season?

Well look, again, my crystal ball is a little foggy, but I think overall North America -- I feel pretty confident about trends right now.

Not just our business, but I think the back-to-school season from everything I can see with our major retail partners is off to a strong start.

I'm not going to speak for anyone else, but clearly our biggest accounts continue to perform.

The one area that is under pressure and I talked about is the J.C. Penney business and they are going through a major transformation/repositioning and we'll start to see how the new shops there begin to perform and hopefully we'll benefit their business as they go forward.

But that is clearly just a business in transition.

Absent that the department store channel is very healthy that I can see.

The outlet channel, I know there has been some talk maybe brand specific or a couple of specific points, but we have really not seen any real blip in outlet at all, it has just continued to perform.

And as we turned into August and the back-to-school selling season, as I said, it just continued to intensify and the kind of trends we are seeing are very positive.

Moving to Europe, we continue to see more of the same.

Northern and Central Europe consumer continue to react, the Tommy business continuing to perform, Southern Europe tremendous amount of pressure, cautiousness about selling into accounts particularly in Italy, a real concern about how we take the exposure there from a credit point of view.

In Spain also the El Corte Ingles business -- very healthy retailers that has historically performed.

But that business given the economy is under pressure.

So those two markets are clearly pulling down the overall market in Europe.

Asia, China, India continues very strong.

Latin America, Brazil which is -- besides currency headwinds we haven't seen any real pressure there on a local currency basis with the business.

So that is an overall assessment of what is going on.

Great.

And then just two other questions.

You were very helpful last year when we thought about rising commodity costs and you were incredibly (inaudible) in talking about how retailers would pull back on units.

Now as we are seeing those commodity costs roll off and you are seeing some benefits in terms of margin, obviously you cited it in the back half.

How to see people flowing through the opportunity on commodity costs?

Would you expect a much more aggressive investment in price or should we see healthier margins across the board?

I think where you will see pressure on price -- and I don't know if you will see it back-to-school, but you may see it at holiday more.

So it was going to be more at the opening price point on the main floor.

I think the collection brands clearly are able -- there is no reason that there should be a movement in price.

We haven't seen any pressure there to move price in the Calvin/Tommy business and some of our competitors haven't moved price at all.

So I don't see it there.

But I think when you get into some of the opening price point businesses I think there you might see some pressure there more so.

Inventories -- right now inventories are in terrific shape.

It has really helped that we have come out of spring/summer so clean, so we are getting an early read on fall selling, which has been very positive.

I think we have done -- I give the merchandising teams in all of our businesses high marks for transitioning summer to fall with appropriate product, wear now but fall appropriate.

So I think we are really benefiting from all of that in our product mix and seeing how it goes forward.

So I think price pressure will be on the opening price point brands and that is the area where you could see some pullback 2% to 3% in AUR.

Great.

And then lastly, on the guidance -- obviously beat by $0.05, you raise your guidance by $0.07 speaks to your excitement and enthusiasm in the back half.

And since the beginning of the year you have always talked about the back half being better than the first half.

So I am wondering in light of the fact that it sounds like you've taken a lot of the risk out assuming slowing in Europe that you are not really seeing and CK at contractual minimums, I am just wondering if in fact trends maintain the outperformance we have seen, should we see a better flow through to the bottom line in the back half versus what we saw in the first half?

I don't know if it will be better.

I mean the first half was pretty strong.

Just to remind everybody, we started this year out we were talking about flat first-half of the year.

And I think if you add the first and second quarter up we are up -- I'm doing the math in my head right now, about 12% to 13%.

So I think as we have really outperformed and have put that through on the bottom line I think you could potentially see similar type of performance if the business trends continue because at the same time that we are increasing our bottom line we will probably be also our increasing our marketing spend as we go forward, appropriate with the sales increases that will be coming through.

So I think hopefully it is just more of the same that continues.

Great.

Best of luck.

Christian Buss, Credit Suisse.

Congratulations on a nice quarter.

I was wondering if you could talk a little bit about your inventory planning and your ability to chase as we head into the back half of the year.

How are you thinking about the overall level of inventories that you want to see at retail?

I think the risk/reward on carrying inventory right now is there is more risk than reward.

And I think if you look at the way the second half comes together given the cost declines that are in the product offering, particularly for holiday, it is much more important that inventories are controlled than we maximize every potential sales opportunity.

So the gross margin benefits for us and our retail partners are so significant I think in the third and fourth quarters we would all be better off managing inventory.

So we will chase, we will chase -- we are able to chase very easily in the replenishment businesses both dress shirts and neckwear given our backup stocks and our raw material positioning.

Obviously in sportswear and in fashion we can't, but we have been always to advance deliveries 30 to 45 days, catch some trends as they go and drop that to the bottom line.

So I think similar to what has happened in the first half of this year and all of the last two years, I think we will be able to capture a portion of it, but I think the risk/reward quotient is against you this year to really get too far ahead of it.

Kate McShane, Citi Investment Research.

I was wondering if you had any detail or further detail on Europe and can discuss how much of your wholesale business is to major customers versus specialty customers and how that might change going forward?

I think 25% to 30% is what I would call major customer.

So the top 20 accounts in Europe represent probably 25% of the business, where in North America the top 20 accounts represent about 99% of the business.

So just to put it in perspective.

So by its nature Europe is a very decentralized business, there is no pan-European retailer anywhere; it usually goes country by country.

And then a number of major countries are really driven by more of a specialty store than a department store business like Italy and especially when you move into the Middle East and Turkey it is more of a retail model.

So a long answer is I think it is about 25% to 30% is what we would classify as major accounts.

And 75% of the business is done with specialty store accounts.

And then with regards to the specialty store counts, obviously the outlook and the back off that you have stated today is very strong.

Are you seeing any credit restrictions on some of maybe the smaller specialty accounts that could be a longer-term threat?

I think Mike will talk about that.

Kate, we do -- we have a credit monitoring procedure in Europe just internationally just as we do in the US.

We also do insure a good portion of our receivables in Europe.

So right now we are on top of it and we are delivering up to credit limits that we have approved internally and that we feel are adequately covered by insurance.

So we feel very comfortable.

But I would say, Kate, is just to amplify what Mike said, is if we wanted to chase business we could book another 2% or 3% but we definitely have made the judgment that the risk/reward is not there, particularly in Southern Europe where in a lot of cases it is much more specialty is store driven.

So we made judgments based on long-term relationships with key customers to go above credit limits that are there with the insurance, but clearly our write-offs on an annual basis have been minimal.

So we think we have got very strong controls in place, but it has dampened some of the growth potential that two years ago we would have been having no problem selling some of these key accounts.

We have really backed off on some of the sales there.

And then my only other question, again the back-to-school commentary has been very positive, but do you have any incremental collar on the Tommy Hilfiger children's introduction for fall?

Well, I guess I would say the Tommy business has been there in kids for a long time, both at Macy's and our own stores.

So it's really -- I wouldn't classify it as introduction; we have a strong business that continues to grow.

We are seeing significantly strong business at Macy's as they have intensified the Tommy presentation on the boy's side and we are talking about future growing the girls business there as well.

In our own stores kids has been a key driver of some of our growth and is comping the last three months well over double digit growth in the stores.

So kid's continues to be a great performer, we think it is a great time of year to be well-positioned in kids and is an advantage for Tommy in those stores.

It drives the mom in who buys for the kids and then we hopefully will convert her to a customer as well.

Thank you.

Omar Saad, ISI Group.

Great job, guys.

I wanted to ask about some of your prepared remarks, Manny, on the heritage business.

You sounded very confident about an inflection point coming.

I know it sounds like it is more on the margin side and inventories are clean, the cost situation is a getting a little bit easier.

How are you thinking about that business from a revenue growth standpoint?

Are we nearing a point where you could see a re-acceleration in that business?

How are you thinking about the consumer for the heritage brands or is that consumer still in a pretty tough place?

Yes, I think the story there is -- I think as we get through the third quarter into the fourth quarter and we have behind us more or less the IZOD and Timberland businesses that we are anniversarying, I think you will start to see sales increases there based on some of the new initiatives in some of the key programs we have in place.

But I think overall when you think about that business I think 2013 and beyond, I think it is still going to be a single digit -- low single digit 2% to 4% kind of growth business.

But ahead of us I think, right now we are projecting annual 2013 -- 2012 operating margins in the heritage business to be up slightly from last year, but -- and then last year was a little bit over 7% margins.

Historically that business has operated at a 10% margin.

We really think over the next 18 to 24 months we bring that business back to something close to 10%.

And if that were to happen when you consider it is a $1.8 billion to $2 billion business that is a significant recovery of profitability and earnings per share growth in this market.

So that is where I think you really have to look at that business to perform and I think it is really going to be -- it is really going to start to become in the third quarter of this year into all of 2013, a significant driver of our profitability improvement year over year for the next 18 months.

And then on the Tommy business, the performance in Europe, it is really amazing how you have been able to manage through this environment.

What is the key -- what are some of the key elements to replicate even a fraction of the performance for that brand in Europe here in the states?

Is it elevating the product quality?

Do you have to think about the channels of distribution?

I know you have got the agreement with Macy's in the outlet business, but maybe layering in some full priced retail.

I know you have been spending a lot more on marketing, which is important.

What do you see as the key element to really kind of replicating what you have done with that brand in Europe and what the team has done with the brand in Europe here in the states?

Well, look, I think when you look at the Tommy business this year our operating margins in North America will be north of 12%, operating margins internationally overall are about 13%.

Europe is probably 100 basis -- 100, 150 basis points higher than that.

So somewhere around 14% operating margins in Europe.

I think as -- the Tommy business in North America has just continued to really show extraordinary growth, so in the first and second quarter this year I think the business is up 11% to 12% topline.

I think -- and we have planned second half at mid-single digits.

I think there is an opportunity to outperform that projection and be more in line with that type of growth.

And I think if that were to happen clearly it would enhance the overall profitability of the business.

So I think in fairness I think like most brands businesses North America, given the nature of the business, the department store environment there, North America is always going to be in a well executed -- even if it is well executed against a well executed European business, will be 100 to 150 basis points lower than the European model would be.

And I think that is the nature of its gross margin profitability.

And to be honest, some of the margin support structure that we have in the United States, it doesn't really exist in many European countries.

So that piece I think is one piece.

What could be exciting in the United States more is the continued growth, really a focus on growing our retail footprint in the United States.

And that is where our focus really will continue, both regular price and in the outlet channel where we have seen tremendous growth there.

So I don't think it is really a wholesale story in North America, it will continue to be a retail story.

We are clearly meeting that consumer demand.

There's geographic areas like the Southeast portion of the United States that we know we are not fully meeting all of our consumers' demand there given some of the markets and where we see opportunities and we are clearly starting to fill that back in, expanding our footprint in existing stores where the store is just comping so strongly we just need more square footage to really continue to grow.

So of those investments are being made behind the brand and I think a continuation as we go forward.

So I think when you look at the Tommy North America business I don't think it really has to take a second-place position against anyone.

So I think the growth there could continue in the mid to high single digit range for the next 24 months.

Great, thanks, guys.

Evren Kopelman, Wells Fargo.

I think we lost Evren, operator.

Sir, please check your mute button, your line is open.

I wanted to ask about if you had any updated thoughts on the time line of an acquisition as you are paying down the debt nicely on the balance sheet.

And again any thoughts on whether it -- more likely it is a new brand or an acquisition of a licensee?

Well, look, I think it will depend on what the market conditions are.

I think clearly we haven't been shy about talking that acquisitions will continue to be a part of our growth story.

But I think clearly for the next 18 months in order to meet all our financial targets we don't need an acquisition.

And I think if one doesn't come it doesn't come.

We have got a lot of Calvin and Tommy initiatives going on with the take back of licenses in Europe, with Calvin Klein, our furnishings and suit business in Europe, some of our license businesses by geographic areas that we are investing in a joint venture relationship in.

So I think we will talk about more of those things in the future as we go forward.

So I think it will be a combination of both.

It would be terrific to get a new brand and a real focus of us from an acquisition point of view has been a focus on the new brand.

Given the operating platform we have in Europe that can really take advantage of potentially taking a brand and expanding it in that market I think is -- so looking for a brand that would both work in North America and Europe and to do what we have done with Calvin and Tommy again would be very exciting for us.

And then on Tommy, some of the comp growth has been driven by price.

When do you begin to lapse some of the price increases and the benefit from the average unit retail?

And at that point kind of are you planning the business and the inventory?

Thanks.

Okay, we are planning in Tommy and in Calvin, since last year's second half we saw a significant AUR increase in last year's second half, this year's first half.

We are really planning AURs to grow less significantly in the second half of this year into next year and our retail price points are actually flat to slightly up in Tommy and in Calvin.

We believe we can raise AURs because we are selling goods so much quicker than we are getting more regular price goods at regular price and first markdown that the average unit retail buy out the door will actually increase.

But our price point, our ticket prices, really we are not planning much increases in North America at all and slightly in Europe some AUR increase based on ticket price.

So that is how it is planned.

I think units will be in line with sales increases and not skewed one way or another because of retail price points at department stores here in North America or in Europe.

So I think there is less chance for confusion about how units are being planned versus sales plans and I think that is much more in-line than it was say 12 to 18 months ago.

And lastly, do you have any thoughts or any contingency plans on this potential East Coast port strike?

What percent of your goods, I don't know, come from the East Coast port?

I'm going to turn that over to Mike to talk about it.

He is on top of all of our logistics.

We are monitoring what is going on with the strike.

We do have contingency plans, we do have ports on the -- we have different ports of entry and different warehouses we can utilize if there is a strike.

So we are absolutely looking and monitoring closely.

Great, thank you.

John Kernan, Cowen and Company.

I wanted to talk about some of the things you are going to be doing next year particularly with the Tom Hilfiger European men's tailored apparel, the ck Calvin Klein European apparel and the accessories business that you are going to bring in-house.

Can you quantify what those businesses may do next year?

Thanks.

I guess, look, I will do it this way.

I will say that the tailored business is about a EUR50 million business today.

To remind everyone, we will lose probably about $5 million -- $4 million to $5 million of royalty income revenue from the tailored business and replace that with a full operating margin business next year.

We start shipping late fourth-quarter of this year into next year.

So we think that will be a nice additive business for us that we can control better in-house and incrementally be more profitable for us as we go forward.

The Calvin business, it's just too early.

We haven't -- it is a total repositioning of where the product was.

We are really probably -- we are not going to be using the ck local so it is not going to be ck Calvin Klein, it's going be Calvin Klein products and from the sportswear point of view that will be going into the market.

So it is a total repositioning, sitting down with the retailers, a lot of enthusiasm.

We are going to start with men's next year and so fall of next year and then go into women's in fall of 2014.

As I said, this is a real investment in the brand.

We are leaving behind $10 million of royalty income associated with that business at contractual minimums that we have been collecting from Warnaco.

So we are giving that up and we will have start-up costs next year that we'll have to deal with as well.

All of that will be factored into the guidance we give next year, but it is something we have to consider.

But when you think about it, if we were going out to buy a $500 million business opportunity and a business that we know very well and we really believe we can execute against, we would be paying hundreds of millions of dollars for that opportunity.

This is a brand that we know, we got it back at no cost, we are taking it in, we're able to build it the way we think it is appropriate, with an operating platform and a management team that we have tremendous confidence in that is clearly delivered on the Tommy side that we are setting up a Calvin on with that business than to leverage off of their infrastructure.

So there is no guarantees in life in anything, but this seems like one that is something that we really could deliver against and get to 2014 and beyond and really start to put up some significant sales and operating profits as we go out two to three years.

Excellent, that is very helpful.

I guess the one region where Tommy Hilfiger might not be living up to your expectations right now is Japan.

What -- how big is that Japanese business and what are you doing there to kind of turn that around?

Thanks.

The business in Japan is about $250 million.

It is a business that historically has operated at an 8% to 10% operating margin.

It is about half that today and it's clearly hurting us on a comparative basis, it is hurting us on a comparative basis the last two years.

So we believe it is really at a low point now.

One of the challenges -- when you talked about the Tommy Brand globally, two markets that have had their challenges from a positioning point of view have been North America and we've talked about the progress we have made there, but also Japan.

The Japan positioning was not -- we took a licensed business and brought it in house about four years ago, it was not positioned the way the rest of the international Tommy business is positioned.

And for us to grow our Asian platform of Tommy to its full potential we recognized early on we had to reposition the brand in Japan.

So that's really -- that has really been the focal point.

We have opened two flagship stores the beginning of this year, made those investments, that is factored all into the guidance and we are really starting to move the consumer in Japan up, trying to raise the brand perception in Japan.

And since so many Chinese tourists in particular travel to Tokyo, in a lot of ways Japan is the fashion capital of Asia, it is really critical that Tommy looks as strong as it needs to look there.

So this was a year for us to make investments in Japan to really reposition and that is what is going on there.

I think that is the positioning story.

The good news there is I think we're at a profitability level that we are projecting in the numbers that is at such a low point about the only way to go from this point is up.

And I think over the next two to three years we can bring this business back to an 8% to 10% operating margin business from now that it is at probably a 3% to 4% operating margin business, all included in our international business.

So I hope that helped.

Very helpful, thanks.

Howard Tubin, RBC Capital Markets.

Manny, given your commentary on acquisitions, if you -- let's say you were to find one in the next year, year and half, would you continue to pay down debt or would you consider maybe starting to repurchase the stock?

I think that is clearly not an issue for this year because we are committed to pay down about, as you said, about $300 million in debt this year.

Probably next year if there was really nothing on the horizon, we would start to look at a combination of debt paydown and potentially buying back some stock and looking at it from that perspective.

So I think we will cross that bridge when we get there.

Clearly our first priority would be to do an acquisition, continue to invest in the Tommy and Calvin businesses, and then potentially look at our capital structure and where we are.

But by the end of this year, I think our debt to EBITDA kind of leverage will be --

About two times.

-- about two times.

So we are in a very strong financial position.

So again, that combination of paying down debt and buying back stock is something we start to think about for fiscal 2013 and beyond.

Got it, thanks.

Joseph Parkhill, Morgan Stanley.

So Tommy continued to be really strong in Germany despite being your largest region.

I was hoping maybe you could give us a little more details behind what is driving the growth there and how long do you think you can have healthy growth within the region?

You are frequently good at sizing opportunities.

I thought if you could put some context around that, that would be helpful.

Thanks.

Sure.

For the German market the Tommy Brand, one, is very strong there.

We are well-positioned in all key accounts.

Retail continues to be a significant driver of growth there.

We are -- just as a benchmark, if you were to look at the Hugo Boss tailored business, it is probably 10 times our size.

We don't believe, given the dynamics of the two brands, we don't believe we would be as large as Hugo Boss over time, but we think we should be 50% of their size in tailored and dress furnishing.

So clearly that is a huge opportunity for us.

And when we look at Germany and the surrounding markets all in, we really continue to think we could over the next five years continue to double the size of that German surrounding markets and dramatic countries there; probably more focused on a retail expansion than just wholesale.

And continue to look at the potential store performance there, and by far our most profitable country in Europe is Germany.

And then just quickly, as far as the acceleration in retail in Europe, did you see that both broad-based between outlets and full price?

Look, both are comping positively, but the outlet store environment is stronger than the full price environment, just given the economic conditions there the consumer is looking -- continues to -- as everywhere is looking for value.

So there could be a 500 basis point difference between the two or more.

But both continuing to comp positively as we go forward.

Okay, great.

Thanks.

Good luck.

Diana Katz, Lazard Capital Markets.

Congratulations on another great quarter.

Manny, you commented you haven't seen any blip in the North American outlet business.

But I was hoping you could elaborate a little bit more on the business.

Perhaps you can talk about the components of the domestic comp.

It sounds like AURs is driving it, but maybe you could talk about traffic and conversion there in the channel and what you are seeing in August.

And then if you could also -- sorry -- talk about the tourist customer.

And then finally with Calvin as you re-look (technical difficulty).

Well, let me answer the question, we seem to have lost.

The first part of the question, the component, I guess traffic for us in general the second quarter was up 1% to 2%.

So really it was -- AUR and conversion is really what drove business overall.

Traffic patterns have actually improved in August and we are seeing traffic up slightly higher than that.

And I think part of that might be -- what you alluded to was the international consumer.

I think a combination of the Olympics, the soccer championships and whatever, I think there was some softness during that period of time from an international point of view, particularly European consumer, in the United States.

But clearly that's bounced back dramatically in August, in the second half of August in particular.

So all of that put into your mix master, the outlet channel is very robust, traffic patterns up 1% to 2%, conversion and AUR really driving.

I think, Operator, we will take one more call, it is after 10 o'clock.

Matthew Boss, JPMorgan.

Given your earlier comments it seems like you are seeing an improving level of underlying strength in women's apparel.

What do you think is driving the change and can you speak to some initiatives for us to follow in the fall?

It is a good call out.

I think if you think about both of our lead brands, Calvin and Tommy, the women's business is always one that we have looked at that we felt should be bigger and have bigger opportunities.

If you look at the woman's potential in the market, the women's business is much bigger than the men's business.

And when you look at our breakout in business Calvin it is 45% women, 55% men and at Tommy it is probably 40%-60% men's to women.

So both having bigger men's components.

So we always view that the women's component would have big opportunities for us.

We are starting to really see that click in a significant way.

Both brands I think have strong following with women and I think both are -- I think if we have fallen down anywhere on the brand level our execution has just been stronger on men's product than it has been on the women's side of it.

And I think some of the initiatives, both with our licensing partners on Calvin and internally with our Tommy product both in North America and Europe we believe has significantly been improved, and the positioning there is significantly improved.

The women's component on the apparel side has clearly been driven.

Calvin, the accessory business on women's has just been outstanding -- hand bags, footwear, even when you look at some of the other women's categories, as I said, dress shirt -- dresses and suits just off the chart strong.

The performance component, G-III is just executing at a very high level.

So those categories have really been fueling growth.

I think when you look at the brand and when we look at the growth we think that two-thirds of the growth in the future should come from women's versus one-third from men's, even though the businesses are more balanced the other way.

And that is just because the opportunity exists for those businesses just to outperform.

And I think it is going to be a continual story that you'll hear over the next three years.

That is great.

And then last question.

On the promotional front, using what you have seen during back-to-school as a gauge, particularly at wholesale, how are you thinking about holiday from a margin perspective?

I really think -- well, what, I -- when we look at the -- what is going on promotionally right now it doesn't feel heavy at all.

In fact, again -- there will be some study that will show me I'm wrong.

But based on intuitively, I don't have hard facts to support this, but based on what I have seen and what we are feeling, we just don't feel that the promotional agenda is as significant as it was this time last year or if you go back.

I think the key there, but when you cut through it all, is when we get into October and beyond is going to be inventory position.

If you watch the inventories, if the inventories are under control, if we get any kind of break on weather compared to last year, I mean everybody suffered through probably one of the longest winters on record and it really hurt late third quarter into fourth-quarter sales performance.

If we get any kind of break there on just a normal pattern to winter weather I think it could bode very well for fourth-quarter and holiday selling.

So again, a lot to do, but I think inventory is going to be the critical focal point there.

And if they are under control the gross margin should really just flow to the bottom line.

That's great.

Thanks, guys.

Okay, with that we thank you all for your attention, we thank you for your time.

And we look forward to updating you on our next call which will be our third quarter sometime in November.

Have a great day and speak to you soon.

Thank you.

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