PVH Corp (PVH) 2012 Q3 法說會逐字稿

Welcome to the PVH Corp third 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 on having any comments or statements you make appear on any transcript or rebroadcast of this call.

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

These statements are subject to risks and uncertainties indicated in the Company's SEC filings and the Safe Harbor statement included in the press release that is subject of this webcast and call.

These risks and uncertainties include the Company's right to change its strategies, objectives, expectations and intentions and its need to use significant cash flow to service its debt obligations.

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 third quarter earnings release which can be found on www.PVH.com and the Company's current report on Form 8-K furnished to the SEC in connection with that release.

At this time, I'm pleased to turn the conference over to Mr Manny Chirico, Chairman and CEO of PVH Corp and Mr Mike Shaffer, Executive Vice President and Chief Operation and Financial Officer.

Please go ahead, gentlemen.

Thank you, Kelly.

Good morning, everyone.

Thank you for joining us.

Joining me on the call, as Kelly says, Mike Shaffer, our Chief Financial Officer; Dana Perlman, our Treasurer and Head of Investor Relationships; and Ken Duane, who runs all of our Wholesale businesses in North America.

I'll start by saying, we're very pleased with our results for the quarter, which we updated due to the Warnaco acquisition, three times during the third quarter.

We beat the top end of our guidance by $0.04.

Given momentum in the Business, we also increased our full year 2012 earnings guidance to $6.37, to $6.38 a share.

Let me get into the businesses.

I'll start with the Tommy Hilfiger business, which continued its strong performance during the quarter.

It posted a 1% revenue increase and a 16% increase in operating income.

When you take out the foreign currency headwinds, our operating performance was even stronger.

On a constant currency basis, revenues were up about 6% and operating income for the quarter was up over 25%.

Moving to the international business of Tommy, internationally revenues were up 4% in local currencies.

Our retail accounts in Europe posted a 14% increase, while the European wholesale sales were flat for the quarter.

Geographically in Europe, 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 Europe in the markets of Spain and Italy.

Our business in Japan continues to struggle with negative comps and operating income declines as we reposition the brand to a more premium position.

We expect these trends in Japan to continue into the fourth quarter and to the first half of next year as this market is being repositioned upward from premium position, because it's the gateway to Asia.

Moving to North America.

We posted an 8% revenue increase for the quarter, driven by a 9% comp store increase in our Retail business and mid single-digit growth in our Wholesale businesses.

We continue to see momentum in the North American business and strongly believe that the significant investments we are making in product, in our stores, in our shop presentations 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.

Most importantly, in North America for the first nine months of 2012, we have seen sales increase 10% and operating income grow by over 50%, which we believe quantifiably demonstrates that these investments we are making are paying off.

Moving to our Calvin Klein business.

We continue to exceed our financial guidance here and post strong results.

Total revenues in the third quarter for the combined Calvin Klein businesses were up 6%, while operating income was up 7% despite overall softness in the global Jeans and Women's Underwear business.

These increases that we've experienced were driven by our Calvin Klein North America Retail and Wholesale businesses, which posted a 13% revenue increase.

The Calvin Klein brand posted revenue increases in all geographic regions with the exception of Europe.

Specifically by region, North America sales were up 3% with all product categories posting strong results with the exception of jeans and women's underwear, which were down double-digits.

Asia, sales were up 13%, driven by double-digit growth in China, Hong Kong and India, partially offset by weak sales in Korea.

Latin America and South America sales were up about 10%, driven by Brazil and Mexico.

Europe, we've seen a continuation of Soft business for Calvin Klein with business down about 8%, related to the poor performance of Warnaco's Apparel and Underwear business.

In our licensing segment, royalty revenues were flat on a constant currency basis.

This increase was driven by strong performance globally in Women's Sportswear, Dresses, Footwear and Handbags, all which posted double-digit increases.

This positive performance was negatively impacted by an 8% decline in Warnaco's global Calvin Klein sales.

Let me put some color on each of the businesses.

I'll start with Jeans and Underwear.

As I mentioned, the overall business was down about 8% on a constant currency basis in the third quarter.

The reduction was due to continued weak performance in North America and Europe, Jeans and Women's Underwear business.

Strong sales in Asia and South America were more than offset by the poor performance in North America and Europe.

Moving to fragrance.

Our Fragrance business continued its strong performance with our royalties up about 4% on a constant currency basis in the quarter.

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

We are very well positioned in this category for the holiday selling season, as Coty has made a major global marketing campaign investment centered around our largest fragrance, Euphoria, which should help to maintain the momentum in this business in the all-important holiday selling season.

Our Women's business in Calvin Klein in North America, both Women's Apparel and Footwear businesses were very strong in the quarter.

Our royalty revenues with our licensees G-III and Jimlar for Women's were up about 10% for the quarter.

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

In addition, our Handbag and Accessory business continues its strong performance.

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

We are targeting double-digit growth for this product category in 2012.

Our CK Bridge business in Asia continues to grow dramatically, posting a 7% increase in revenues for the quarter.

We expect this business to grow mid-teens for the year.

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

For 2012, as we've previously discussed, our CK royalty revenues are being planned flat for the second half of the year, due to the uncertainty in Europe and the weakness that we see in our North American and European Jeans business.

In order to take the financial risk out of our guidance, we are currently projecting all of the European Jeans and Apparel businesses that Warnaco operates at contractual guaranteed minimums for fiscal 2012.

As such, our Calvin Klein European royalties are being planned down about 10% for the year.

Overall, we are planning total royalty revenues on a constant currency basis to grow about 2% for the year.

Moving to our Heritage business.

Excluding the impact of the exited businesses, ongoing revenues for the Heritage businesses increased 3% in the quarter.

Comp store sales in the quarter in the Heritage business were flat, while our ongoing Wholesale businesses posted a 4% sales increase, due principally to strong growth in the IZOD and Van Heusen Sportswear businesses.

Operating income increased 4% to $47 million, driven by strong performance in our Wholesale Dress and Sportswear businesses, partially offset by continued weakness in our Retail businesses, particularly the Bass business.

Clearly, our Heritage business is in the midst of a major turnaround.

We are very confident and feel we are very well-positioned in this business.

Our fall order book is on plan.

Inventory levels are in line with our retail sales plan.

AURs are currently up about 5%.

Product costs are decreasing between 5% to 7% and our in-store presentations are being enhanced and expanded with key customers.

The IZOD JCPenney store openings are performing and doing very well for the last three months.

All of this gives us a high degree of confidence that we'll see a dramatic improvement in the Business beginning in the fourth quarter of this year.

Let me talk a little bit about fourth quarter trends that we're seeing in the Business.

I'll start with our International Tommy business.

At Tommy Retail in Europe, our comps continue to post low teen comp store increases against about a 5%, 6% comp store plan.

Tommy wholesale which represents about 70% of our business continued its strong momentum.

We are seeing no indication of slowdown or cancellations with any of our European customers and feel very good about our European sell-through season to date.

The fall season is off to a strong start.

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

Looking out to spring 2013, our order book is complete and it would indicate a wholesale sales increase for the first half of 2013 of between 4% to 5%.

In the US wholesale businesses, both Calvin Klein and the Tommy Hilfiger business continue to perform well ahead of plan.

We continue to see increases in our out-the-door retails.

Our margins at retail are very strong.

We feel very confident about how this business is moving forward.

As I mentioned, we're seeing strong business in the Heritage portion of our Wholesale business, as well.

We had very strong sell-throughs through November.

We experienced AUR increases, particularly in our Sportswear businesses.

Moving to our North American Retail businesses.

November comps which were impacted by Hurricane Sandy, our comps for Calvin Klein were relatively flat for November.

The Tommy Hilfiger business posted a 4% increase in comps.

Heritage businesses are running down low single-digits.

Business in the first half of November was significantly impacted by the storm which we estimate impacted November comps by between 250 to 300 basis points for the month of November.

We continue to feel confident about this business.

For the second half of November we've seen our Retail business come back on plan and get back on the trends that we saw in the third quarter.

As we look out into the fourth quarter, the holiday season is off to a good start.

We are highly confident that we will deliver our fourth quarter plan, which projects ongoing revenues to grow 7% on a constant currency basis and earnings per share to increase over 25% to about $1.49 per share this year.

So, we feel good about where we're positioned.

With that, I'm going to turn it over to Mike to quantify some 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 third quarter results.

For the third quarter, we exceeded our revenue guidance and delivered earnings per share of $2.34, which was $0.04 above the top end of our guidance and 24% greater than the prior year.

$0.03 of the $0.04 EPS increase over our previous guidance was due to favorable timing of certain discrete tax items that were planned in the fourth quarter.

Our total revenues, excluding currency translation and discontinued businesses, were up 4% to the prior 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 6%.

Our Calvin Klein revenues for the quarter were plus 6% to last year and also better than guidance.

Overall, third quarter operating margins increased 150 basis points over the prior year, driven by a 260 basis point increase in gross margin.

Moving to our guidance for 2012.

We have raised our full year EPS guidance to a range of $6.37 to $6.38, or an increase of 18% to 19% over the prior year.

We raised the top end of our full year earnings per share guidance for our $0.04 third quarter beat less the $0.03 that was attributable to the timing of taxes between the third and fourth quarter.

Revenue for the year is planned to be up 6% excluding the impact of foreign exchange and our discontinued businesses.

Total Tommy Hilfiger revenues are planned to be up 8% on a constant currency basis, with both Tommy Hilfiger North America and Tommy Hilfiger international increasing about 8% on a constant currency basis.

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

Gross margins for the year are planned up about 170 basis points with expenses for the year planned up 100 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 by about 70 basis points over 2011.

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

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

For the fourth quarter of 2012, earnings per share is planned at $1.48 to $1.49, or an increase of about 25% to 26% over the prior year.

We're planning our revenues to increase 7% to 8% over the prior year, excluding the impact of foreign exchange and exited businesses.

Our gross margins for the fourth quarter will be up about 300 basis points with all businesses planned to show gross margin due to -- gross margin improvement due to higher average unit retail selling prices, combined with fall product cost decreases of about 5% to 7%.

Overall operating margins for the fourth quarter are planned up about 200 basis points, influenced by mix of business and gross margin improvement.

Our tax rate for the fourth quarter is planned at 22%.

We are continuing to project term loan repayments for the full year of 2012 of about $300 million, which would bring our term loan repayments since the date of the Tommy acquisition to about $1 billion.

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

(Operator Instructions)

David Glick, Buckingham Research.

Congratulations on the quarter.

Manny, I was wondering if you could give us a little more color on the performance of the Jeans and Underwear business, both domestically and internationally?

Whether your view on that has changed since you announced the acquisition?

How you look at the business progressing next year?

Is it a repositioning year?

When we can start to really see the benefits of your involvement in that business?

Thanks.

Okay.

On the Jeans business, I think Warnaco's been very transparent about the challenges in that business, particularly in Europe and some of the difficulties they've worked through in North America.

I think a number of the initiatives that they've put in place really will start to benefit next year, particularly second half of the year, focused really on product enhancements, the regional design -- the centralized design focus that they're bringing to bear.

It seems to be well-received in the market from our diligence and sitting with a number of the retail accounts, talking about business, I think they're being planned up in some of the major retailers for spring and we think that momentum should only accelerate as we go into fall here in North America.

So, very positive about I think how this business will start to progress beginning in 2013 and really into 2014 next year.

So, really no change from how we viewed it here in North America.

Also, similar to what Warnaco's, I think Europe will be a slower turnaround.

I think there, the whole business needs to be repositioned.

They were in the process of doing that.

We will do that again as we integrate them onto our European platform under the Tommy Hilfiger leadership management team, Fred Gehring will really take over full responsibility for that.

I think that will go through a transition.

I think that will be a transition year, where we'll probably see sales go down slightly further in 2013 as we reposition the brand for profitability and for profitable growth, really positioning it well for 2014.

I think all of that has been captured in the initial call-out that we gave about accretion in 2013, assuming the deal were to close on the first day of fiscal year.

As we said, we're still very comfortable with the $0.35 of accretion that we talked about a month ago.

So, really no change, except maybe some validation of what we saw in diligence and we've gotten more involved, just a continuation of that.

We really see great opportunity in the Jeans business, both domestically and internationally.

Great, thanks.

On the Bridge business in Calvin Klein, you commented on the strength in Asia.

Does the integration of the Warnaco business change your thinking on when your management team can launch that business in Europe?

I think that's all under review right now.

As you can imagine, the plan was to really bring that out 2013, but now with the taking on of the Jeans business, I think we're really just re-evaluating that whole timing.

If that makes sense, is it better to make a grand launch together, repositioning of the brand.

We'll make that decision in the next 30 to 45 days.

So, the team is really working on that, looking at it.

We'll see how it all comes together.

Okay.

Last question, on Cramer last night you were pretty positive about the North American consumer.

Just wondering if you could give us some perspective on what you've seen in this holiday season so far.

Obviously a lot of disruptions, distractions, how you're -- what gives you the confidence that it's going to continue to be a strong holiday season?

I guess the best confidence we have is the last two weeks of business both at Wholesale and Retail.

Cutting through everything, you can sit here talk about the fiscal cliff.

We could talk about all the economic issues, but really particularly at wholesale, we've just seen a lot of momentum in our Big Sportswear businesses on sell-through, on AUR and you know how that works on -- you in particular, David, know how that works.

That really should benefit allowances at the end of the year.

We're really looking for dramatic improvement, all brands very positive.

As I said, the AUR is up pretty dramatically.

On the seasonal businesses, you're seeing some benefit relative to last year, where it was a challenge?

When you say seasonal, you're talking cold weather --

Cold weather, yes.

No, we have a small Outerwear business relative to our size that we, are and we have -- but we have a big Sweater business.

The Sweater business has been good but I wouldn't say great yet.

What we're really seeing is the Basic Sportswear businesses that the brands really represent driving it across the board.

There's so much noise in the holiday season with the extra weekend at the end, with the two extra days between Thanksgiving and Christmas, I think personally if you want my crystal ball, I think it's going to come.

I think it's going to come later.

I think it's just the nature of how the calendar's laying out.

I'm sure we're going to have a lull in the beginning of December where everybody's going to panic for a moment.

But I'm sure -- I just feel it, that it will come back strong as we go into the last two weeks of -- before the holiday.

Great.

Thanks, Manny.

Good luck.

Christian Buss, Credit Suisse.

I was wondering if you could talk a bit about the markdown dollar benefit that you got year-over-year.

How you're thinking about that as it plays out for the balance of the year?

We are getting a markdown benefit, particularly on the Heritage side.

I think last year where that hit us by far, the hardest was in the fourth quarter.

I think the fourth quarter has the ability to really see in the Heritage business 400 plus basis point improvement in gross margin, probably 400 to 500 basis point improvement in gross margin, driven a little bit by, somewhat by cost declines, but significantly be driven by out-the-door retail increases that we're really starting to experience as we go into December.

That's helpful.

Could you talk a bit about what you're seeing as you start to place your buys for spring 2013 from a sourcing environment?

Yes, I think it's consistent to what we said about three months ago.

We're looking for costs down about 4% to 6% for spring 2013.

That's been bought, put to bed and is done.

That's great to hear.

Thank you very much.

Good luck.

Omar Saad, ISI Group.

Great job, guys.

I wanted to ask, you mentioned that the efforts in Japan for Tommy to reposition it in more upscale premium positioning -- obviously, the brand's had a lot of success with those efforts in Europe.

It sounds -- seems like it's also still happening in North America.

Can you talk about on the Calvin Klein side with the impending acquisition of Warnaco and a more holistic control over the brand.

How do you think about the opportunity to bring that brand up market a little bit and make it more of a premium brand globally?

Well, look, outside of North America, the brand is premium positioned.

In Asia, our out-the-door retails in sportswear are over $100.

So we are positioned probably just slightly higher than Tommy is positioned in our Sportswear businesses throughout Asia and South America.

So I think that the positioning of the Calvin Klein brand is terrific there.

The Calvin Klein brand is actually growing in Japan.

It's not as big a business as we'd like but it continues to grow in Japan.

It's a challenged market.

So I -- we don't have a repositioning from a brand point of view to do at all with Calvin Klein in Asia or Latin America.

The real repositioning needs to happen from both a process operations point of view, as well as the brand, really in apparel, taking its rightful place in Europe.

So, Omar, I just disagree with the premise of the question.

The brand is growing strongly in Asia, up double-digits.

It's a premium position.

I wouldn't want to take it any higher.

I'm not looking to -- we don't view Calvin as a luxury brand.

We view it as a premium status brand.

I think that position works really well for us.

Got you.

Thanks.

In terms of -- how are you looking at the -- I know you're going to probably do some things to manage it more for profitability, maybe slow some of the square footage growth, investments that need to be made in that business -- I know it's all embedded in the outlook that you provided.

But is this a multi-year investment process -- accelerated investment process and scaling back on the square footage growth for Calvin Klein?

I think it is, look, I think to be determined.

I guess we were very comfortable with the guidance we gave that talked about the accretion growing from $0.35 to $1 a share.

Beyond that, the opportunities to do things that are outside the plan and accelerate the growth beyond that plan, that's really what we need -- we don't own the business yet directly.

We're working very closely with Warnaco about planning the integration, particularly the back office and looking at things from a strategic point of view.

But it's just too early to comment.

We only announced the deal a month ago.

So I think it's too early to really comment exactly what kind of growth we'd see year by year.

But give us the time.

As we get into the first quarter of 2013, we'll put some more flesh on that.

Then any quick comments on the accessories opportunity across your brands?

It's obviously been a big theme in the marketplace.

Yes.

I just -- I guess I would start by saying both Tommy and Calvin are global designer lifestyle brands.

They're not accessory brands by their nature.

They have -- they both have the ability to have a significant accessory component.

Calvin Klein's is significantly more developed today than the Tommy business is developed.

We're seeing strong growth in basically Asia.

We're seeing strong growth in North America with the accessory business.

We think it's a significant opportunity in Europe, given the design aesthetic of Calvin Klein.

Given the design capability we have in the Calvin Klein design studio which we don't think we've been fully utilizing, but now that we have control of the brand particularly in Europe, we think it's a real opportunity for us to grow that accessory business, both in Asia and Europe pretty dramatically.

It will be a key component.

In North America, we're looking at free-standing Calvin Klein accessory stores.

Those have -- the first three that we've opened have been real success stories for us, so we think it's -- we think what's great about the accessory business is it's -- one, it's very profitable.

Two, just by the nature of the product presentation, where Calvin Klein sits, it's significantly brand enhancing.

So, the opening of those stores in regular price malls or in street locations that really can be -- that can be profitable, at the same time I think just lifts the level of the brand.

It really coordinates with all our marketing efforts.

So, it's an area of growth that I think you'll see us really going after 2013 and beyond.

Evren Kopelman, Wells Fargo.

It's [Mary Casper] in for Evren.

I was just hoping -- if you could guys could please further elaborate on the Tommy Hilfiger comps in both Europe and North America during Q3.

What specifically is driving these gains in each of the regions?

I know you mentioned AUR increases.

But is it a mix shift or price increases in those AURs?

Then maybe traffic and conversion?

Okay.

In the third quarter, Tommy was up, I think, 9%.

It was -- not to sound sophomoric, but it was everything.

We saw higher AURs.

We saw better conversions.

Traffic was up low single-digits for the third quarter.

I think the key area and benefit that I think we're getting first and foremost is product.

The product has been enhanced.

It's been invested in.

The consumer's been willing to pay for that product at full price.

At full price, first price for us in our retail stores.

So we're seeing it across the board.

In Europe, I think there's two things going on.

Just, the strength of the brand continues.

We continue to be better retailers globally and continue to just maximize that business.

We are significantly underpenetrated as a brand in the outlet venue throughout Europe.

We're just starting to open some of those stores and working with the brand management.

We're not going to overdo it, but we have such a low penetration in that market that as we go into it, given the brand strength, we really perform exceedingly well.

That's part of the benefit, as well.

But we're seeing strong sales increases in our regular price stores and in our outlet stores throughout Europe.

So it's a combination of all those things.

Geographically, in Europe I guess I would just say, I mentioned it in total, but our retail stores tend to be much more central and Northern European focused.

We don't have that many stores in Italy and almost no stores in Spain.

So, I think over time as those economies come back, those are markets that we believe have a retail opportunity.

But right now, given the uncertainty there, it's not an area where we want to invest.

Not having that exposure, I think, really shields us from some of the more difficult retail markets throughout Europe.

So, I think we're benefiting from that, as well.

Okay.

That's helpful.

Then maybe in conjunction with that, how are you approaching the marketing for the holiday season?

Is it stepped up year-over-year, and what differences are you seeing?

I think, the strategy is more or less the same.

We continue to really invest behind the Meet the Hilfigers campaign at all levels.

That investment has clearly paid off.

We are spending a larger and larger percentage of our marketing dollars on -- digitally and using -- going to that venue.

Trying to focus both with Calvin and Tommy on a younger consumer and bringing that consumer into the ranks.

I think it's really helped our whole omni-channel strategy, both in North America and in Europe.

A combination of all bricks and mortars, all wholesale distribution, our own Internet that we sell on and then selling through some of our key retailers where we've seen dramatic growth at Macy's.

Some of our key retailers here, with the Calvin and Tommy brand online, has really just enhanced the performance of the brands overall.

So, I think that's really been -- as we've owned the brand, as we really focused on both Calvin and Tommy, it's become much more of a holistic marketing approach and really trying to connect with the consumer in the hot zone when they're making the retail decisions either in-store or online.

Okay.

Then, one more question.

Bringing it back to North America, looking at Black Friday weekend.

You mentioned that wholesale was very strong, but how about the environment in your own retail stores?

Can you talk to traffic trends, how are the promos year-over-year, are things more aggressive in this channel?

Let me break it -- the two week period, second half of November, was right on plan.

I would say the outlet environment for the three day period of the weekend, traffic was down compared to prior years.

I think the noise that the big box retailers were doing from an advertising positioning point of view, the noise that was also going on even at the regular mall where there was much more earlier openings, we've owned that -- the outlet environment three years ago owned that time frame from 9 o'clock on Thanksgiving night to 5 o'clock in the morning.

We were almost the only game in town, and it really just started to -- we really benefited from that.

Competition during that period of time has now gotten much more intense.

Walmart opened at 9 o'clock.

Sears was opened early.

Everyone really was -- Macy's opened much earlier.

So, every retailer was much opened, by midnight, we were competing with everyone.

So, we saw traffic down in the three day period.

But we also saw our retail comps -- it's only two days -- were really bounced back strongly Monday and Tuesday of this week back on trend.

I think it was a moment in time, a lot of noise, a lot of advertising going on, people looking for electronics and other things, not necessarily an outlet venue.

I think that's what happened on Black Friday.

Erinn Murphy, Piper Jaffray.

Congratulations on a great quarter.

Manny, I was hoping you could just maybe elaborate a little bit more on Japan.

If you think about that market, could you parse out maybe how much of that negative comp is tied just to general consumer malaise in that market overall versus the changes you made to the reposition of the Tommy brand?

Then, I guess, with respect to the repositioning, how are you communicating those changes to the consumer in that market?

Okay.

I think, look, I'm going -- to be totally transparent, it's very hard to quantify that.

I think that Japan is clearly not a growth market, but by the same token, I don't think on a relative basis that retail is under -- dramatically under-performing there.

So, I think we have to recognize that the vast majority of the downturn that we're seeing there is self-inflicted from a brand positioning point of view and what we're doing.

So, I think it from that point of view.

We have clearly tried to step up marketing in that -- in the Japanese market.

We've opened two flagship stores to really make a statement about the brand and try to really speak to the brand and lift it up.

We've really invested behind the products.

So it is a dramatic change that the consumer's seen over a 12-month period.

It's going to take some time for them to accept it and understand it.

I think it's going to be a slow grind which will continue.

I think it's a market that -- the good news is, I think it's really at a low point that we'll be able to bounce off of, but still, to get it where we really want to it be, this is a three, four year process of repositioning the brand, similar to what's been done here in North America over the last six years.

We're really seeing the fruits of that the last few years.

I think Japan will be a similar situation.

But it really needs to be done.

Tokyo is the fashion capital of Asia.

You can't be misaligned as a brand in Japan and then really want to be big in China, India, Korea, where we're experiencing double-digit growth across the board.

So, I think it's really important for the brand positioning to be appropriately positioned there.

We're making those investments.

Fortunately, we're able to absorb the hits that we're taking because of the strong performance here in North America and in Europe.

Okay.

That's helpful.

Then, just a quick clarification on some of the comments you made earlier on Southern Europe.

In particular, still obviously underperforming the Northern European side.

But are you seeing any basing of trend there just as we've anniversaried a very significant year in Southern Europe of very tough trends?

Yes, it's down less but it's still down.

I guess that's the best way I can describe it.

Okay.

I think it's bottoming out.

I think it's finding its bottom.

I think all of those things.

But it's still a very -- it's still a market that's very challenged, those two markets.

If you think about the holiday season in Europe, could you maybe just speak to how you're thinking about the overall promotional environment, anything that you've changed in how you're looking at the brands in Europe for the holiday?

I think what we've done exceedingly well is manage inventories.

So we are not in a situation and given these, the strong sell-throughs, both at wholesale and the comps that we posted throughout the year, we're in a very good inventory position.

So I'm not sure what the promotional environment will be overall.

It seems to be pretty much level where it was last year.

It's different market by market.

But in general, we don't have a big inventory issue that we need to move goods or whatever.

So if sales trends continue as they are, we should continue to see gross margin improvements as we go forward.

So this is not an environment where we try to be a hero.

We've said that pretty consistently.

We really bought to the order book and not gone after every last drop of sales.

We really tried to cull out some of the bottom level of some of our retail accounts that we worried about from a credit point of view.

So, we really tried to prune it and be meticulous about how we manage the business in this environment.

The uncertainty in Europe causes us to be more risk averse as opposed to where we were, say, in 2010, where given the strength of the momentum of the business we were willing to make investments behind inventory that really capture market share.

This doesn't seem to be the environment that you want to do that.

(Operator Instructions)

Diana Katz, Lazard Capital Markets.

I understand you're not providing guidance today for next year.

But more on a conceptual basis, can you talk about if there's anything new within the trajectory of the Tommy business outside of taking in the Tailored business that we should consider for next year?

No, not that I can think of.

I just looked around the room.

On the Tommy business, I think it's more of the same.

Europe will grow, but it will be more conservative.

We talked about 4% to 5% top line growth including the Tailored business.

I guess that's basically -- that's all I have to say.

Okay.

Then as Tommy's business is really benefiting from the growth in preppy trends, is there anything you might be changing about the aesthetic for Calvin Klein to capitalize on some of these trends?

No.

I think you have to stay true to your brand.

18 months ago when modern contemporary was more in line, we didn't change Tommy to be red, white -- from red, white and blue to black, gray and tan.

I think color has become more important.

We try to do color in a Calvin-appropriate way.

But, again, we will stay true to the brand.

In North America and Asia, I think Calvin Klein is clearly the leader on the modern contemporary side in department store floors, and that's a position we need to fill.

We can't trend off of that.

In a lot of ways, you gain more market share in tougher markets.

So in a market like this, I think our competitive set is -- in the modern contemporary side is really suffering.

We're growing in a traditional preppy cycle, so clearly overall the Calvin Klein business is gaining market share.

So that's a positive that we'll just take.

Given our portfolio of brands, a lot of our brands that are much more traditional in nature like Tommy, IZOD, are really benefiting from the fact that we're in this cycle.

We have other brands like Van Heusen and Calvin where modern contemporaries and refined dress up is more in line, those brands perform.

I think it's this balanced approach and staying true to what the brand is.

Okay.

Then, what's the plan for the Heritage retail business, particularly Bass, to turn that around?

I think it's -- look, that's a long-term strategy.

We've been disappointed with the volatility of the Bass business.

Keep in mind, it's a $250 million business, represents 3% of our sales and maybe 1% of our profits.

So, we tend to be so transparent, we talk about everything.

So, there's a number of initiatives going on.

Hopefully, we'll start to see some improvements, investment in product and the heritage of what Bass stands for, that management team is working on it very closely.

Okay.

Then finally, on the fourth quarter model, it seems gross margins are coming in higher than originally planned for the year.

Is this purely driven by the Heritage businesses or other areas contributing to out performance?

Then similarly, SG&A seems to also be coming in a bit higher.

Is this primarily to opening larger stores or is there something else within SG&A?

I'll let Mike talk about that.

Basically, the gross margins are up about 300 basis points and pretty much as we planned them.

I don't believe we've had much change there.

Heritage is driving that business, driving those margins up.

That's the biggest piece.

But all our businesses are seeing gains.

The cost decreases are a major factor there.

On the expense side, the increase in expense is primarily the pension expense and that's really it.

Then, of course, anything to do with the additional revenues and as you pointed out, some square footage growth, but costs are -- our expenses are in line with our plans and in line with the first three quarters of the year.

Mix of the business, SG&A is going to grow as a percentage of sales.

Gross margins will grow also because Calvin and Tommy -- Calvin and Tommy retail businesses, in particular, are growing faster than everything else in the portfolio.

So, it's just a natural offshoot.

The key issue is to make sure operating margins overall are growing at the same time.

Dave Weiner, Deutsche Bank.

I was looking for a little bit of color on the sourcing environment into -- as we turn the corner into next year.

I think in the past, you've called out, kind of as a go-forward as we cycle some of the increases from last year, moderate apparel cost inflation moving forward into 2013.

So I was -- I know there's a lot of moving parts to that, but I was wondering if you could comment on that.

Then, importantly, whether you think you'll be able to continue to offset those with continued AUR increases?

Whether those would be coming from explicit price increases or more if there's some underlying mix shift in some of your brands that's generating that AUR shift?

Thanks.

I'm going to make Ken answer the question on sourcing and give you the specifics for next year.

Obviously, you've seen the change in fourth Q. As we moved through fourth Q, we've seen some of those cost decreases come through on the sheet.

Then, as you move into spring 2013, it's a 4% to 6% decrease, I think Manny spoke about it.

Then, in fall 2013, where it's generating about a 4% to 6% decrease again for 2013 for fall.

Okay.

So, it continues on.

Then, you'll see a leveling off as you move to 2014, because you've had a full year of it.

You'll annualize a full year.

David, once you get out to -- we've got indication now on fall holiday as Ken said, down in that 4% to 5%, 6%, who knows where it's going to finalize.

But it -- depending on the mix of the business, as well.

It's clearly like more of a continuation of what we saw -- we're seeing in spring is what we expect.

But when you get into 2014, it's going to depend on supply and demand, capacity issues at factories, specifically.

I've always said, I think, what you've quoted me -- is I've always said is, when that levels off and when the economy bounces back globally, and I don't know when that is going to be, there will become a point in time again where demand will outstrip capacity.

We should start to see more of a moderate -- we'll start to see a moderate increase in cost of product.

I think it's natural.

There's significant global pressure going on on labor rates around the world.

We've gone to so many different countries that ability to just keep shifting production.

I think there's opportunities, but not as great as it's been in the past.

So, I think we have to start thinking long-term that we're going to start to see cost increases.

That will have to be factored into our business models.

But again, that's 2014 or beyond as we look out.

That's helpful.

So, I guess, given what you've said for 2013, the decreases in terms of the plan for AUR, would you continue to expect to raise that level or maybe that will flatten out, as well?

I guess it will depend on the brand and geography.

At this point, with an environment of 4% to 5% cost declines, I don't think we would be comfortable raising AURs.

In fact, we're taking some of those cost increases and investing in product which may in fact raise the AUR but at the same time may not necessarily raise the gross margin overall.

So, I think our gross margins will improve because of mix of business year-over-year.

But right now, at this stage, we wouldn't be planning for AUR overall increases on top of the last 18 months of pretty significant AUR increases.

Gentlemen, at this time, I'd like to turn the conference back to you for closing remarks.

Okay.

Thank you very much.

I guess I'd thank everyone for their time this morning.

We'll be speaking to you in March, giving our fourth quarter earnings call.

Have a great holiday season.

Speak to everyone soon.

Take care.

That concludes today's conference.

Thank you all for joining us.