PVH Corp (PVH) 2012 Q4 法說會逐字稿

Good morning, everyone and welcome to the PVH Corp.

full-year and fourth-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 make 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 March 27, 2013 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 the 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 full-year and fourth-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 am pleased to turn the conference over to Mr. Manny Chirico, Chairman and CEO.

Please go ahead, sir.

Thank you, Kayla.

Good morning, everyone.

Joining me on the call is Mike Shaffer, our Chief Financial Officer and Dana Perlman, our Treasurer and Head of Investor Relations.

We are going to break the call down into two parts.

Mike and I will take you through 2012 first.

We will do an overview of the business and Mike will take you through the financial results and then we will go through a discussion of 2013, some of the early trends that we see in the PVH business, as well as talking about some of the trends that we see in the Warnaco businesses and our perspective on how the integration and acquisition will be moving forward throughout the year.

And then we will open up the call for questions.

Let me start by saying, given our fourth-quarter results, we were very pleased.

We beat the top end of our fourth-quarter earnings guidance by $0.05 a share and came out of the year very clean from an inventory and receivable point of view, which we think positions us very well for the first half of the year.

Let me start by talking about the Tommy Hilfiger business, which has been our stellar performer for 2012.

In the fourth quarter, the Tommy business continued its strong performance, posting a 9% revenue increase.

Excluding the extra 53rd week, revenues increased 6%.

In the fourth quarter, operating income increased 45% over the prior year.

Focusing on the international business, internationally, revenues, excluding the 53rd week's revenue, increased 5%.

Our retail comps in Europe posted a 9% increase, while European wholesale sales were up 3% for the quarter.

Geographically, we continued to see strong growth in central and northern Europe with particular strength in France, Germany and Turkey, partially offset by the continued weakness in southern Europe, particularly Spain and Italy.

Moving to North America, excluding sales for the 53rd week, revenues were up 7% in North America, driven by a 5% comp store sales increase in our retail business, square footage growth at both wholesale and retail and mid-single digit growth in our wholesale business for the quarter.

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 the shop presentation and our marketing programs are paying dividends for us.

Just to give the full-year perspective on Tommy, our Tommy Hilfiger segment consolidated posted a 5% revenue increase with operating income growing 24% to $437 million.

Operating margins in the Tommy business consolidated increased 200 basis points to 13.6%.

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

Total revenues in the fourth quarter for our combined Calvin Klein businesses were up 14% despite overall softness in the global jeans and women's underwear businesses.

These increases were driven by our Calvin Klein North American retail and wholesale businesses, which posted revenue increases of over 20% driven by square footage growth at both wholesale and retail.

Operating income increased 5% in the fourth quarter despite a $6.5 million advertising expense increase relating to our Calvin Klein underwear campaign, which centered around our Super Bowl commercial.

Absent this brand marketing investment, operating income would have been up 15% for the quarter.

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

Specifically by region, North America sales were up 4% with all product categories posting strong results with the exception of jeans and women's underwear, which were down double digits.

In Asia, sales were up 3% driven by mid-single digit growth in China, Hong Kong and Southeast Asia, partially offset by continued weak sales in Korea where business was down double digits.

Latin America and South America continued their strong performance posting a 12% sales increase driven by Brazil and Mexico.

In Europe, sales were down about 13% principally related to the poor performance in the Warnaco apparel and underwear businesses.

In our Licensing segment, overall royalty revenues were up 4% on a constant currency basis.

The increase was driven by strong performance globally in women's sportswear, dresses, footwear and handbags, all of which posted double-digit increases.

This positive performance was negatively impacted by a 9% decline in Warnaco's global sales of jeans and underwear.

Moving to our Heritage businesses, excluding the impact of the exited business, ongoing revenues, excluding the 53rd week for the Heritage business, increased 3%.

Comp sales in the Heritage retail businesses were relatively flat while our ongoing wholesale businesses posted a 4% sales increase due principally to strong growth in IZOD and Van Heusen sportswear businesses.

Operating earnings in the quarter more than doubled to approximately $27 million driven by the strong performance in our wholesale dress and sportswear businesses.

Partially offsetting this strong performance was the continued weakness in our retail business, particularly Bass.

With that, I would like to turn the comments over to Mike to quantify some of the fourth-quarter results.

Thanks, Manny.

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

Our earnings per share for the fourth quarter was $1.60.

Included in our fourth-quarter earnings is a $0.06 benefit for a change in accounting for pension expense, which I will talk about in a moment.

The fourth-quarter EPS of $1.60 represents a 34% increase over the prior-year amount, which is also adjusted for pension expense.

Excluding the change in pension accounting, our earnings per share were $1.54, a $0.05 beat to the top end of our guidance.

Driving the earnings improvement over last year was revenue growth of approximately 7% and a significant increase in operating margin.

Revenue growth was driven by strong performance in Tommy Hilfiger and Calvin Klein.

Operating margin increased 250 basis points over the prior year due to a 320 basis point gross margin increase.

The gross margin increase was due to decreased product costs, coupled with higher average unit selling prices, as well as faster growth in the higher-margin Calvin Klein and Tommy Hilfiger businesses.

In the fourth quarter, we made a change to the accounting for our pension and post-retirement benefit plans.

Our new accounting method aligns with fair value concepts and is the preferred method of accounting.

In addition, this change aligns our accounting method with the method utilized by Warnaco.

The new method recognizes actuarial gains and losses in operating results in the fourth quarter of each year in which they occur versus our old method, which smoothes such gains and losses out over many years.

The change in accounting method created a $0.15 benefit for the full-year 2012 and a $0.06 benefit in 2011.

Additional details on the change, including the impact on our quarters and segments, are presented in our press release.

I will now turn it back to Manny and we will talk about 2013.

Okay, thanks, Mike.

I am going to focus on some of the 2013 trends that we see in the business today and also on our guidance.

I will talk about the PVH standalone business, as well as the Warnaco acquisition and those businesses as well.

Let me start with Tommy Hilfiger internationally.

In Europe, our retail comps continue to run ahead of plan with comp sales up about 5% to 6% on a shifted calendar basis against a low single digit comp store plan.

From a wholesale perspective, we are running right on plan.

Our spring and summer sales are planned up at about 4% to 5% and we continue to see good sellthroughs with our key customer accounts.

As we look to the fall holiday season, we have seen an acceleration in our European business with our fall and holiday order book up over 10% against a five-year planned sales increase for the back half of the year.

We are seeing double-digit growth in fall sales in Germany, France, Scandinavia, Russia and Turkey offset by softness in Italy and Spain.

Moving to North America, in North America, our retail business is being impacted by this unseasonably colder spring weather, particularly in the Northeast and Midwest where 65% of our stores are located.

For our North America retail businesses, I am going to talk about our comps on a calendar shifted basis to make it sure it is apples-to-apples.

Calvin Klein is running on plan at about 1% to 2% positive comps with very strong margins.

The Tommy Hilfiger business is running ahead of sales plan, posting a 4% comp store increase along with also very strong margins.

Our Heritage retail business is the one that we are seeing considerable pressure in.

Comps in our Heritage retail business are down 9%.

We are fortunate that we have come out of the year so clean on inventories that we haven't seen significant margin pressure to date.

We believe this is a weather-related issue and that this business will start to show positive signs as we move into more seasonable weather in the coming months.

Our Heritage wholesale business, which represents over 60% of the Heritage segment, has seen a major turnaround in financial results and continues to perform.

We feel we are very well-positioned in the Heritage wholesale business.

Our spring orders are on plan, inventories are in line with retail sales plan and our in-store presentations are significantly enhanced and we have expanded our in-store shops with key customers.

The Izod JCPenney shops are performing at plan levels and are one of the best-performing brands on their selling floor.

All of this gives us a high degree of confidence that we will continue to see wholesale business improvement in 2013.

In North America, our wholesale businesses at Tommy and Calvin continue to perform and to record strong sales gains, particularly with Macy's where both brands are performing very well in the spring season.

Moving then to Calvin Klein Licensing business, in 2013, we continue to see strong growth in all licensed categories now that Warnaco jeans and underwear business have been taken in-house.

However, we are contending with a $20 million reduction in revenues in 2013, which is a direct result of the expiration of some long-term contractual agreements that guaranteed minimum revenues related to the European bridge business, the North American women's wholesale business and the Calvin Klein collection business.

Let me move to Warnaco.

We have owned the business about 45 days and we continue to be excited about the long-term opportunities that the acquisition presents.

We continue to see significant growth for the Calvin Klein brand both through geographic growth and product category expansion.

However, in order to capture these significant global growth opportunities, we need to invest in Warnaco's infrastructure, logistic supply chain, product design team and systems in order to create a stable global growth business.

Let me give you an overview of how we are viewing each of Warnaco's business units.

I am going to start with Calvin Klein Asia.

This is about a $530 million business that has grown at a double-digit rate over the last five years.

This business has aggressively grown by significant square footage growth through a combination of new store openings and franchise distributor acquisitions.

Over the last three years, there has been a lack of investment in the infrastructure of this business.

We will need to invest in the operating infrastructure and fully integrate this business into our systems and supply chain over the next 24 months so that we can efficiently capture the growth in the market.

The Calvin Klein brand is very strong throughout Asia and we are planning the business to grow about 5% in 2013.

We are currently seeing comp store sales growth in China and all of Southeast Asia of about 5%.

The only difficult Asian market for Calvin Klein is Korea where comp sales are down double digits in the context of a difficult consumer environment and a difficult denim landscape.

Moving to Europe, Europe is about a $500 million jeans and underwear business.

For the period 2007 to 2010, this business operated at a 10% to 12% operating margin.

However, business has been quite difficult over the last two years and operating margins in 2012 were below 4%.

Our plan is to fully integrate this business onto our Tommy Hilfiger European operating platform over the next 12 months.

We will also move the European headquarters of Calvin Klein from London to Amsterdam where it will be under the direct management of our PVH European senior management team led by Fred Gehring and Daniel Grieder.

The Calvin Klein European business in 2013 is planned to be down low to mid-single digits as we are planning to shut down about 15 to 20 unprofitable stores, as well as reduce our sales for the off-price channel and unproductive small specialty accounts.

We believe that by initially shrinking the business in Europe that we will improve the overall profitability of the business and better position the business for sustainable long-term growth.

Moving to North America, the Calvin Klein North American business for jeans and underwear is about a little bit over $500 million with 10% operating margins.

The business is comprised of a very profitable underwear business and an underperforming jeans business.

The jeans business has been overly dependent upon the off-price and club channel and as such, Calvin Klein has lost its leadership position in jeans with all of its major department store customers.

We are highly confident that, over the next two years, we can turn the Calvin Klein jeans department store business around.

What makes us confident is first and foremost the strength of the Calvin Klein brand.

Second, as a management team, we have significant credibility with our retail partners and they have significant confidence in us that we will deliver for them.

We can leverage off of the tremendous success that we have experienced in our Calvin Klein men's and women's apparel business and accessory business across North America.

We are committed to invest in shops and fixtures, as well as point-of-sale marketing and in-store merchandising coordinators to enhance the in-store presentation and experience for our customers.

We are investing in product design talent and product quality to upgrade our jeans product presentations to our consumers.

All of this gives us the confidence that we can turn this jeans business around, rebalance our distribution in North America to a more regular priced business and take the business forward in a positive growth mode into the future, 2014 and beyond.

Moving to Latin America and Mexico, the Calvin Klein business in Mexico and Latin America is a little bit over $200 million.

It is principally a wholesale business with strong double-digit operating margins.

The brand is very strong throughout South America and it enjoys a premium positioning throughout Latin America.

We see this business continuing to grow at about 10% in 2013 and beyond.

We have a very strong local management team based in Brazil and Mexico and this business does not require significant additional investment in the future.

Finally, the Warnaco Heritage business of Speedo and core intimates are very similar to PVH's wholesale Heritage businesses.

They have strong management teams in place that deliver solid operating results.

These businesses recorded sales of a little over $400 million in 2012 and we are planning these businesses to grow 2% to 4% in 2012.

Finally, let me close my comments by saying having now owned the Warnaco business for 45 days, we are disappointed that we have had to come back to you with revised downward 2013 earnings guidance for the acquisition.

However, the additional investments we are making today are necessary to build a sustainable growth business in Calvin Klein.

We feel much more comfortable today that the long-term opportunities both for Calvin Klein and PVH are significant.

We believe that the required near-term additional investments in infrastructure will accelerate the future growth of our business.

We believe that will translate into earnings per share growth in excess of 15% in 2014 and beyond.

With that, I would like to open up the -- let me turn it back to Mike -- I'm sorry -- I almost forgot my main man.

Let me turn it back to Mike to just quantify some additional items about 2013.

Thanks, Manny.

I wanted to put some color to 2013 revenues and operating margins.

Our revenues for 2013 are projected at $8.2 billion.

The standalone PVH company revenues are slightly over $6 billion with standalone Warnaco revenues comprising about $2.15 billion.

Year-over-year comparisons on revenue were impacted by the elimination of about $200 million of intercompany sales in 2013.

In addition, standalone PVH Corp.

benefited by a 53rd week in 2012, which is worth about $40 million and the impact of not only Warnaco for the first 10 days of our fiscal year, which is worth about $60 million.

Our plans reflect standalone PVH revenues growing about 3%, excluding intercompany elimination and Warnaco sales are basically flat to the prior year.

As a reminder, the Chaps business has been excluded from our go-forward guidance and the prior-year comparisons as PVH has not kept the license.

Sales for Chaps were approximately $230 million.

Manny covered current trends and projections, so I thought I would cover the impact on operating margins.

Our operating margins for 2013 are planned at about 12%.

This reflects a 40 basis point reduction to 2012.

The Warnaco businesses for 2013 are planned to operate at about 8.5% to 9% operating margins, which is bringing down the overall PVH operating margin to 12%.

Lastly, I just wanted to spend a minute on the dilution associated with the transaction.

Our original guidance was that this transaction would result in about $0.35 of accretion.

Our new guidance is $0.25 of dilution, a $0.60 decrease.

The cause of the decreases are $45 million, or 20% shortfall in earnings, and $25 million of reduced synergies for year one.

The biggest change related to synergies is higher-than-estimated amortization of non-cash intangible asset expense of about $10 million.

In addition, we lost $5 million of earnings due to the closing of the transaction 10 days into the start of our fiscal year.

We continue to think the transaction will generate $100 million in annual synergies.

However, we now estimate that we will need four years to attain these savings rather than our initial three-year timeframe.

As a reminder, total debt is now approximately $4.5 billion and we expect interest expense of about $200 million in 2013.

And with that, operator, we will open up for questions.

(Operator Instructions).

Bob Drbul, Barclays.

Hi, good morning, guys.

I guess if we could just focus a little bit more on the Warnaco piece of it, Manny.

When you guys look at the last 45 days, can you just talk a little bit more sort of about the biggest surprises that you have found?

And sort of, on the $100 million, Mike, the trajectory of the accretion as we go forward from the dilution this year and as you look over the next several years?

Like how should we think about it like from a ramping perspective?

Okay, Bobby, I guess, look, it's really -- the surprise has been in these lack of investments that were made in the basic operating platforms at Warnaco.

Really some significant growth has gone on there with their business.

A good portion of that growth driven by either new stores or acquisitions of franchisees and licensees.

A lot of those acquisitions weren't fully integrated into the Warnaco business, so as we got visibility into their systems and a better understanding of how they were structured and maintained from an operating platform point of view, we really started to learn that there was multiple systems being run as opposed to regional systems being run.

So the integration for us really is now required to be focused on a country-by-country basis as opposed to what we would have anticipated was more a regional integration, Europe, Asia, North America.

We've really had to now really focus particularly in Asia to go to China, Korea, the balance of Southeast Asia, then move to Europe.

So it has really slowed down the pace of integration from what we would have thought would have been 15 to 18 months to more like, today, we are thinking that is more like 24 to 30 months as we go forward.

So that has had a significant impact in that we haven't been really able to achieve the synergies and the cost savings, expense savings that we anticipated as quickly as we thought.

So that has put a pretty significant pressure on the accretion and dilution.

In addition, the other challenge that we found, particularly in Asia, but also in North America, is a level of inventory that really needs to be disposed of.

And although some of that could be just naturally dealt with with the acquisition accounting, it is going to put some pressure on normal operating margins as we are going to need to liquidate a higher level of inventory, particularly in the first nine months of the year and that is going to put pressure on the overall Calvin Klein margins.

We think it is critical to move quickly on that, turn that inventory into cash and at the same time clean the pipeline up as quickly as possible as we go forward.

So those were the two biggest surprises we saw and really required us to get in and have hands-on into the business as opposed to being able to view it public company-to-public company.

And Bobby, in terms of the $100 million and modeling, the way we are thinking about the synergies right now is $25 million this year and then building $25 million per year to get to the $100 million.

Great, thanks.

And Manny, if I could just jump in with one more question is can you elaborate a little bit more on the European business?

The acceleration in the order book, what really is driving that in terms of the business and what do you think about it from like the macro perspective as well?

Sure.

I think there is two -- when you think about the business, if you look at the fall 2012 sales at wholesale level and our spring 2013 -- spring/summer 2013 sales, both were up about 4% overall when you look at those two seasons combined in a 12-month period.

And if you think about that, those were the two seasons that needed to be rationalized by the retailers where they started to see a softness in their business beginning in fall holiday 2011.

So what tends to happen in our wholesale model is not only you deal with the fact that open-to-buy dollars are being shrunk, but also at the same time the need to bring inventory levels down to the new reality of what was being faced in Europe.

As we got to the second half of this year, we started to anniversary that phenomenon.

So that part of the takedown is behind us, so I think that is healthy for the business and the business is now growing with retail sales in our wholesale account.

In addition, there is no getting around it.

We are gaining marketshare significantly throughout Europe just based on the strength of the brand there, the quality of the product and design that has gone into the product and the outstanding performance by our management team to continue to position us throughout Europe.

In what I think everyone is talking about a very challenged market, we have been able, over the last two years, '12 and really projecting into '13, to being able to continue to grow that European business at a mid-single digit rate when the consumer overall is being challenged.

Finally, I think we do benefit from the fact that 75% of our business is in northern and central Europe where the consumer is stronger, where we do have a very strong base there and we have a growing business -- we had a growing business in southern Europe.

That has clearly slowed, but being such a small portion of our business, it hasn't impacted us as much as some other brands.

Right.

Thank you very much, Manny.

David Glick, Buckingham Research.

Yes, thank you.

Manny, your senior management team has gained a lot of credibility and well earned over the last several years in terms of how you have executed.

And I think that is why people are a bit surprised with the change in the Warnaco outlook.

How do you get us comfortable with your view that you think you have kind of reset the bar that you factored in I think hopefully conservatively how the Warnaco business is going to unfold this year?

And then within those additional investments, how do we think about what is one-time and what is ongoing?

Okay, let me take -- I guess I will start by saying, look, there is no guarantees in life, so I can't give you guarantees.

I think we clearly are disappointed about that we have had to move the numbers.

We have tried to be as transparent as possible to really lay it out in excruciating detail so you can understand what we are doing.

I have no doubt that what we are doing is right, is correct, appropriate and will pay dividends into the future as we reset the bar and reset the growth targets for Calvin as we look to 2014 and beyond.

This is a major complicated acquisition.

It is over $2 billion in sales in four geographic regions.

It is -- I am not going to be Pollyanna about this.

This is more complicated than other acquisitions we have done and it has required us to really dig in.

We believe we understand the expense structure now and we believe we understand the investments we are making.

Always have to be concerned about the macro environment and if that were to change, what that might not only do to the Warnaco business, but also our PVH business.

Putting that aside, we think we have gotten all of the news out about our infrastructure, the investments that need to be made, the timeframe that it is going to take to do this integration.

And we think we have a very disciplined approach to the integration to take it forward that not only gets -- that moves the business forward, but also protects the base business as we go forward, not to put things at risk.

So with that framework, I feel that that presents -- puts us in a positive position as we go forward and that we have tried to be as transparent to lay all of this out.

Finally, I would just say, it is repetitive, but some of these problems that we are facing in the short term create more long-term opportunity.

We were surprised on the logistics side, on the infrastructure side, on the supply chain side.

But by the same token, as we fix those things, without a doubt, those weaknesses today create more long-term opportunity for us as we go forward as we hopefully improve that infrastructure and supply chain as we go forward.

So on that level, trying to look at the glass half full, I think it gives us greater confidence that we really -- that our long-term strategic rationale for this transaction is even more -- is even more solidified as we go forward.

Thank you.

And just one quick follow-up, so basically you have a business, call it, $2.2 billion and 8.5% operating margin.

Your business, the core PVH business had a 13% operating margin.

Clearly, a major gap with an opportunity to close it.

How do we think about the opportunity to move the top line in the Warnaco business versus the operating margin and which do you see improving more quickly and at what kind of pace?

Okay, David.

Over time.

I understand.

I think the way I would -- look, we believe that there is significant long-term top-line opportunity for Calvin given the, if nothing else, the geographic growth that we see with the business and the product category introductions that we can have that we haven't allowed Warnaco as our major distributor in Europe, Asia and Latin America to really have access to.

So men's and women's sportswear and accessories clearly are a tremendous growth vehicle for us outside of North America.

They are significantly underdeveloped compared to the Tommy Hilfiger businesses in those regions.

So there is tremendous top-line growth.

How that plays out over the next three years, I have to be directly honest with you, that is what is in process now is the strategic overview.

What I do have strong confidence, and I think it will be there, I am just not ready to quantify it by year and really lay it out in great detail at this point.

Perhaps six months from now, we will have an Analyst Day and we will go through it and we will be able to put more color on that as we have our arms around the acquisition.

As we look at the -- but as we look at the operating margins, your point, if you think about let's take the $1.8 billion of Calvin Klein business that exists at Warnaco, that business is operating at an 8% operating margin.

That business has a clear opportunity to move towards our consolidated PVH operating margins over the next three to four years.

And I think it will be -- I think it will be a cadence over that three to four-year period that we move from 8.5% to something approaching let's use 12% as a reference point at this point now.

So I think you could anticipate operating margin expansion during that period of time as we go forward.

Thank you very much and good luck.

Christian Buss, Credit Suisse.

Hi, this is Bilun Boyner for Christian Buss.

I was wondering if you put together any thoughts around how you will improve the acquired retail store portfolio.

I know you mentioned some store closures, but other than that, are there any other early initiatives specifically for the retail network?

Yes, I think when we look at the business, particularly in Europe, there was a series of stores that were opened for revenue growth that appear to us to just be unproductive.

So I think on first pass, very simplistically, I think there is a number of stores in Asia and in Europe that, by closing, will make ourselves more profitable and more productive and we are aggressively moving in those two areas as we go forward.

Secondly, Warnaco's strength, I believe, as a company has been on the wholesale side of the business.

That is where their expertise has been, particularly in Asia.

When you think about the Asian business, they have done a tremendous job of growing that business, but, if you go through and look at the retail expertise that are in the business, it is not as deep.

We clearly are a business that, when you look at our business, where just under 50% of our business is being done in retail and we believe we bring a level of expertise that can help that business, particularly on the planning and in-store merchandise and presentation side of the business.

And we are excited about that and we think you should really start to see those benefits really in 2014 as we are able to reposition the product, we are able to reposition some of the stores, that will come through.

So the investments we are talking about making, planning systems, in-store merchandising, really trying to enhance the customer's experience at point-of-sale, those things are all the investments and those things are really retail-related whether it is that we are directly operating the retail store ourselves or in Asia where we have a significant network of franchise partners and we are -- we believe we can help them run better retail businesses, although we are selling into them wholesale.

Okay, that's very helpful.

And then can you provide some more color on how Warnaco's new design team is progressing?

I guess it was largely put in place earlier last year.

Yes, I think we are very satisfied.

Karyn Hillman, who has joined us as our Chief Merchandising Officer over jeans and jeans accessories, we couldn't be more thrilled that she is there.

The spring '14 product and even to a degree holiday '13 where they have had minimal influence, maybe more in North America than anywhere else, we really see the dramatic improvement in product.

We have seen a significant improvement in the quality and she has brought a level of expertise with the team that she has brought into focus on jeans that we think will pay dividends and we are very happy that that was an issue that was put in place by Warnaco early on in the process.

We believe we can help that process, particularly on the supply side of the equation, really on the sourcing side giving our network and our capabilities that exist in Europe to source for the European denim business and in North America given the large sourcing base that we have here.

So we continue to believe we can improve the flow of goods systemically and getting them through our distribution network to help the product sell better on the floor and to get to the floor in a more appropriate basis.

Great, thank you very much.

Kate McShane, Citi.

Thanks, good morning.

Manny, based on your comments, it sounds like the Latin America business of Warnaco is in much better shape.

Then you said you are not requiring any additional investments there.

So will we start to see you growing the Tommy Hilfiger brand through their distribution system there this year or are you going to wait for the entire platform to be revamped?

No, I think, look, over time, both Latin America, Asia, I believe there is opportunities to appropriately bring businesses in-house and in some cases, when we look at some geographic areas, it might not make sense to directly operate some of these businesses and will be more efficient to either have a licensing relationship or licensing/joint venture relationships and we are looking at each of those geographies as we go forward.

But in the short term, I don't think in the next 24 months you will see a dramatic change in any of those businesses.

We have a great partner in Tommy in Brazil.

We believe we have tremendous growth opportunity with our Brazilian business in Calvin.

We believe the real opportunity for Calvin -- when you think about the Latin America business of Calvin, it is principally a jeans business.

There is a huge opportunity to grow the sportswear and accessory component of that business, men's and women's, and I think that is where we really should focus on is taking the strength that we have in Calvin and growing the Calvin business and allowing our partner to grow the Tommy business.

And then three years or so from now, look at both of those businesses and decide should we be thinking about bringing businesses in-house.

Clearly, the deals we have struck has given us that flexibility.

It has also done the same thing in Asia for us to give us the flexibility there.

And I think as we look at our long-term growth, that is clearly part of our strategy.

But the first priority is to get the operating platforms and infrastructure set up and then grow the existing Calvin business and then think about consolidating.

Okay, great.

Thank you.

And then my second question is on cleaning up some of the inventory.

How exactly are you going about it?

Are you pushing through some of the underwear and jean inventory through to your outlets or with regards to markdowns, how aggressive do you need to be to clear that inventory?

Okay.

To be clear, whatever inventory -- the inventory issues that we are dealing with are in jeans.

We don't have any significant inventory issues on the underwear side of the business.

So this is really a jeans denim issue and it will require liquidation.

We will use our stores as appropriate and we will also use the off-price channel.

Our goal is speed.

We want to be able to make the goods hit and disappear as quickly as possible.

We don't want the goods to linger.

It is not good for the brand and it is not good for our cash flow and cleaning up the pipeline on product.

I also think secondarily is we want to be in as clean a position not only in our channel, but with our customers' channel when we turn to spring 2014.

So it is critical for us to really move quickly to clean this up.

It will require some significant markdowns, some which will be provided for, the extraordinary nature of the markdowns, but some, a couple hundred basis points, that is affecting the existing business as well because as you markdown a certain level of goods, it puts pressure on your current goods as well.

So we are contemplating all of that, trying to make it flow through, but that is the nature of how we are looking at it.

Okay, thank you very much.

Omar Saad, ISI Group.

Thanks, good morning, guys.

Manny, can you talk a little bit about how the Europe team, the Tommy Hilfiger team, the talent you have over there, the infrastructure you have over there, how you're going to be able to leverage that with the Calvin Klein Warnaco piece in Europe that you've brought in-house now?

What are some of the key opportunities and how will that progress over time?

Is it a two-year story and is it revenue and margin category expansion, geographic expansion or do you really need to shrink that business before you can start to grow it again?

I think I said in my opening comments I think it will be shrink the business initially, meaning 2013 and I think actually by shrinking the business, we will actually improve the profitability of the business.

We are really lopping off unproductive wholesale accounts and we are taking out unproductive retail stores.

That is our goal.

We have a, similar to North America, we have a profitable underwear business that we believe, with better inventory flow, we could make more profitable.

And we have a disappointing apparel business, be it bridge and jeans combined, that has really been a money loser for us.

That is the business where I think our Tommy team can very quickly -- quickly meaning spring 2014 -- very quickly bring improvements to.

The supply chain in particular, Warnaco tended to source all of the European product out of Asia.

A majority of our product comes out of the Mideast basin, much more quick response, react to the business.

We have a proven supply -- quality supply base that has grown the Tommy Hilfiger denim business to a very profitable EUR300 million business.

So we believe we have the tools in place to really enhance that business.

We think we are uniquely positioned given the strength of the management team, given the product categories that we are really focused on to see improvement in that business much quicker than Warnaco would have been able to deliver on a stand-alone basis just given the quality and expertise of our management team.

And the credibility that the management team has with the key wholesale accounts throughout Europe country-by-country, having that sales network established, already having -- in the process of consolidating showrooms and sales offices in each major market I think will really position us well as we go forward and should really start to pay significant dividends for us as we go forward.

And the last thing I would say is, consistently across the board, the Calvin Klein brand, all the research that we have done geographically, Europe, Asia, Latin America and North America continues to support how strong the brand is and even independent third-party research that you see in Women's Wear Daily or in some of the luxury magazines that do their own -- the Calvin Klein brand is always -- if not the top brand, one of the top two designer brands in the world.

This is an infrastructure turnaround of a business; this is not a problem brand by any means.

This is a brand that has got great opportunity for growth that we are just not taking advantage of, particularly in Europe where the brand on a relative basis is so small compared to what the opportunities against the market is.

Thanks.

That is really helpful, Manny.

And then still on the Europe, if you think about the success that Tommy has had with those guys -- they have done an amazing job.

The wholesale and the retail business and this kind of lifestyle presentation, a lot of times in flagships for Tommy Hilfiger and that is kind of replicated on a smaller scale on a lot of the wholesale channels.

Does the Tommy team who is going to help with the Calvin transition in Europe, do they see that opportunity to kind of transition how the consumer interfaces with the brand over there?

Is there a flagship opportunity in kind of connecting the denim and the underwear and the sportswear and the accessories all kind of under one consumer-facing retail format?

Definitely.

Retail will be a significant portion of the growth.

It has been with Tommy -- again, balanced retail, balanced flagships, balanced outlet store business, very profitable and even our regular price -- our regular specialty stores with Tommy are very profitable.

We have 30 flagship stores throughout Europe as well.

We think that there is a need for more retail presence, more regular price retail presence in major cities and I think, over the next three years, you will start to see -- there is already a store in London.

You will see more presence in the UK, you will see more presence in France and you will see more presence obviously in Italy and Germany as we go forward.

So there is clearly the need to also build retail up.

One of the benefits we have is we have this tremendous underwear business that, if managed inventory correctly and manage the flow, very profitable and we have this jeans business that we think if we get right, we start off, we believe, with a business that is very profitable.

So we don't have to build the brand in Europe the way the Tommy team over a 10-year period had to build a knowledge of what Tommy Hilfiger is with the European consumer.

Europeans have a very high opinion of what the Calvin Klein brand is and has a very high perception of that.

So although we will have retail stores and we will make investment, we are starting from a much stronger brand position than the Tommy management team had to start with in Europe.

So we can use that, I think, to our advantage to move more quickly over the next three to four years.

Thanks, Manny.

Eric Beder, Brean Capital.

Good morning.

Thank you for taking my question.

Thank you, Eric.

Could you talk a little bit about some of the other licensees for Calvin Klein now in perfume and I guess in the eyewear?

How did those do and what are you expecting those guys to do in 2013?

Sure.

Let me start on the women's side of the business, North America, our key strategic partner there, G3.

That business grew double digits last year driven by women's sportswear, dresses, suits and outerwear.

The handbag business also had tremendous growth.

We are planning that business right now at mid-single digit growth.

As usual, our partner, G3, tends to be -- has consistently tended to be conservative in their estimates and they have overachieved.

We would hope that is the case this year.

There seems to be more demand and based on the performance of those categories right now, that would seem to be a conservative number.

But that is the way the business is being planned, up 5% to 6% for 2013.

The fragrance business, which is very large and very aspirational for the brand, we are planning very modest growth in that business, 1% to 2%.

It is a big business.

We have a big share of market there.

Offsetting that is we have a number of new launches, in particularly a big launch in fall that is going to have a significant marketing investment behind it.

So we will see how that will play out.

So we think we are being reasonably conservative about the projections in the fragrance business as we go forward.

Footwear has been an area that, particularly on the men's side, has seen substantial growth.

We are planning that business to grow mid-single digits where this year it grew at a double-digit rate.

So I guess I would characterize that we think we have taken a prudent approach with the Licensing revenues.

We think the categories that will continue to be strong for us have been strong for us and we think if trends continue, there is an opportunity to outperform our estimates on the Calvin Klein Licensing side.

So we will see how that all progresses.

I hope that was helpful.

Thank you.

In terms of the marketing spend, you talked about the Super Bowl ad.

How should we think about the marketing spend going forward now that you have integrated Warnaco into the mix?

And I guess it is kind of a more unified -- it was always pretty unified -- but even more unified marketing.

But how should we think about that going forward?

Well, I think the marketing message will be more unified.

I think principally because -- I guess the biggest differences we see going forward and it will -- 2013 will be an evolutionary year as we pull it in, but if you think about it is, by license agreement, as you would expect, the significant amount -- the very large jeans business required that all of that advertising go directly to its jeans advertising.

And I think that was -- that was out of balance for the brand.

We think we would like to spend that same amount of dollars and spend it on the Calvin Klein brand similar to more what we do on the Tommy side of the business where we have denim and jeans ads, but we do it in a much more connected lifestyle brand focus.

So that will be a bit of a change.

From a spend point of view, I think you will see a couple of things.

I think the spend on balance will be about the same.

I think what you will see is clearly spending more digitally as we go forward, less in print, probably a little bit more outdoor than we have been to really complement the digital advertising.

And I think as we go forward, more in-store marketing investments in fixtures, investments in point-of-sale marketing, investment in our own stores and our customers' stores taking some of the ad dollars and really putting them in the hot zone to drive business directly when the consumer is in there and acting on it.

So as a licensor, we needed to -- the approach was all about brand enhancement and brand image-building and I think the Calvin group does a great job of that.

As we now are becoming much more brand-operated and controlling over 50% of the brand directly, I think you will see more of the brand spent at point-of-sale and really trying to deliver against a return more directly against sales as opposed to just image-building.

Great, thank you.

Evren Kopelman, Wells Fargo.

Thanks, good morning, everyone.

I wanted to ask about the Warnaco North America Calvin business, the one you said $500 million.

So first, what do you expect for 2013 growth?

I don't know if I heard that.

And then secondly, you said it is pretty off-price club-dependent.

Can you give us a little bit more sense of the size of that?

And going forward, should we expect maybe another year of reduction in 2014 before that starts to grow?

And also is the profitability of that off-price club higher than maybe the rest of the kind of department store business and again, should we expect first a reduction in profitability as you balance that out?

Okay, I guess the $500 million -- I am not going to -- make it really clear, I am not breaking out distribution by channel.

But what I would say is it is out of balance.

What we would like to see is a more healthy balance as we go forward over a 24-month period.

We are planning -- we are looking at the jeans business and planning it relatively flat to down low single digits in 2013 as we do some of that rebalancing.

We really see a significant opportunity on the jeans side to grow the regular price business and that is a business that we really think will enhance the overall jeans presentation throughout North America, which we think is very important.

So the short answer is I think you will see this business relatively flat over a two-year period, but the plan is to really have more sales going through the regular price distribution and slightly less sales going through the off-price.

And again, that is really on the jeans side of the business.

The jeans side of the business overall has been a much lower operating margin business.

The club business, obviously, is a profitable business, but sometimes selling into the off-price business is not so profitable.

We really need to bring balance to that.

And I think as overall by -- we believe we can enhance the profitability of the US business by just changing the mix of business, bringing some of our expertise to manage the businesses and flowing inventory better and potentially improving the product, which we think will have the real benefit of improving the sellthroughs of the gross margins as we go forward, not necessarily looking at initial gross margins, but looking at maintaining gross margins after sellthrough, after markdowns and selling at higher price points.

Better product will do that and it's easy to say and sometimes hard to execute, but we really think we see a clear lane to deliver against that.

So I think, relatively speaking, you will see $40 million to $50 million moving out of the off-price channel, club channel moving to the regular price channel over a two-year period.

So I don't want to overstate that as well, but it is important to get that.

What is even more important, it is less about the club business; it is more about having jeans presented appropriately consistently with everything else we are doing with the department store business, be it underwear or be it men's sportswear, be it women's sportswear or accessory business.

I don't think anybody presents product and presents their brand in a better way at the department store level than Calvin Klein with the exception of the jeans business.

And I think the jeans business, there has been a lack of shop investment, a lack of point-of-sale investment.

We clearly will change that.

I know that will enhance the business, the presentation, put it front and center with the consumer.

When we get the product right and the presentation right, the Calvin Klein brand consistently performs and shines.

So we have little doubt that that will be the case here.

Great.

That's very helpful.

The other question is on the Heritage side, wholesale.

I think you said a major turnaround.

It's interesting to hear because of all the challenges in the mid-tier channel, but maybe give us a little bit more color on that, kind of what is driving that.

I think Van Heusen sportswear is new; I hadn't heard about that as much, the strength there.

And the other one is I think we are expecting an operating margin improvement in 2013 in Heritage and if you can spell that out a little bit as well.

Is there still lower product cost benefit early in the year?

Maybe what is the markdown opportunity?

Thanks.

Look, I think to put it simply is our Heritage businesses historically have operated on a 10% operating margin basis.

We were -- we underperformed in the second half of 2011 and we underperformed in the first half of 2012.

Operating margins this year are relatively flat with last year at around 7%.

So there is clearly a 200 to 300 basis point improvement that we think we will deliver over the next two years.

The part of the business that clearly is performing for us is our wholesale business, both Dress Furnishings and our sportswear businesses, despite the weakness in the mid-tier channel.

Our businesses there are healthy, performing.

We've suffered with the contraction that has happened at Penneys on the dress shirt, neckwear side of the business.

From 2011, it has probably cost us $40 million in sales on the Dress Furnishings side, but by the same token with the investments that we have made along with JCPenney on the sportswear side with Van Heusen and IZOD, we have made up that $40 million difference in the mid-tier channel to really position ourselves to be relatively flat overall with the dress shirt business being weak, but margins because it's a replenishment business under control and not really being able -- taking a big hit there.

We think we are well-positioned as we go into '13 to continue the momentum we saw in the second half of the year on the wholesale side of the business.

So I would anticipate operating margins at least 100% higher for the year in 2013.

The challenge for us continues to be our retail businesses which are -- Heritage, which are underperforming and we need to get those back in line and we are working very hard on that.

But clearly we are seeing significant wholesale margin expansion.

Next question.

John Kernan, Cowen.

Good morning, guys.

I wanted to shift gears a little bit to Tommy Hilfiger, which obviously continues to be on fire both in North America and international.

If we look at some of the operating margin expansion there, particularly in North America in 2012 and in international as well, even in the face of pretty difficult currency comparisons, how --.

John, I'm sorry for whatever happened -- you broke up on my end.

I apologize.

Can you just repeat the question?

Yes, sorry.

On Tommy Hilfiger, obviously has been a great -- the momentum there continues.

North America operating margin up another 400 basis points this year, the international side of the business the operating margin increased in the face of difficult currency comparisons.

How should we think to model the Tommy Hilfiger profitability going forward?

I think we would continue to look for 20 to 40 basis points improvement in overall Tommy Hilfiger margins.

Mix may play more positively to that as we go forward, but given where we are performing now at these levels I think that is a reasonable place for us to be.

I think that there is opportunity, but clearly we have captured tremendous opportunity in 2011 and '12.

So I think you have to think about it more in those terms.

Okay, great.

That's helpful.

And then just shifting back to the Warnaco portfolio, EBIT guided down about 20% and revenue is flat.

What is the magnitude and when do you think that the top-line growth in that Warnaco portfolio can start to begin again?

Well, I think really it is a 2014 story and beyond.

I think it's -- we really -- and I've got to be honest, we may be even shrinking the first half of 2014, but again it will be -- what we will be shrinking is unproductive, unprofitable sales, not necessarily productive sales.

What you have to think about also is there was a pressure on Warnaco given the licensing agreements in place that certain sales thresholds needed to be maintained and grown in order to maintain the business.

So there was an appetite on that side to grow the top line in order to maintain the license and some of that growth was cannibalizing other businesses or just not very efficient growth overall.

As the operator of the brand, we -- obviously, we want to clean that up and really bring it to a much more productive base.

So I don't think you should be viewing this contraction in the business that we are going to have to go through for the next 18 months as a negative and we will try to be clear that what channels or what is causing some of the decline and try to give you a clear picture into how we are seeing the growth in the regular priced department store business with some of our wholesale key accounts around there and with the ongoing comp retail businesses as we see and pulling out -- we will pull out the businesses -- the stores that we are identifying to be closed out of the comp numbers so we can really try to isolate that for the investor base as we go forward.

So I guess I would just say don't view some of that contraction as a negative.

There is growth as we go forward.

We see it in Asia and Latin America, in particular and the growth in North America, although it may be, net net, getting rid of some bad distribution for some good distribution, I think you will see the operating margins improve there as we go forward and a very similar story in Europe as well.

Shrinking to more profitability I think in the next 18 months in Europe and North America is the critical focus.

Okay, and then one final question for Mike.

In terms of CapEx for this year and next, where do you see the CapEx needs of the business and then how should we model debt paydown on an annual basis?

Okay, what we are talking about for CapEx for this year is about $300 million.

I think as you look to next year, that number will probably be similar to this year at about $300 million.

In terms of -- just a heads-up, that doesn't include the one-time costs, which we are talking about and capture separately.

So true CapEx for the ongoing business is about $300 million.

And debt paydown, we are looking at about $400 million for this year.

Okay, great.

That's helpful.

Thanks.

Erinn Murphy, Piper Jaffray.

Thank you for taking my question.

Manny, I wanted to circle back on some of the comments you made earlier just on the sourcing and supply chain opportunity for Calvin Klein jeans.

I mean as you have dug in there a little bit deeper over the last 45 days as it relates to this opportunity, can you just share a little bit more detail around your learnings of what has maybe surprised you there most and maybe compare how you are viewing the Calvin Klein jeans opportunity for improvement relative to what is happening at the Calvin Klein underwear business from just a sourcing and supply chain perspective?

Thank you.

Okay, I guess what is the biggest surprise and the biggest opportunity as we go forward is a significant lack of inventory planning systems and the leadtimes required in the Calvin Klein jeans and underwear business are four to six months longer than what we are used to operating at.

So the management team has been forced to have to make decisions 12 months out on inventory purchases and commitments with their factory base where we tend to make commitments out six months usually and sometimes eight on some categories.

We are making commitments, but not committing exactly to what is being made.

So there was really an over -- a very long leadtime that I think really, when business gets a little bit tighter, is where you really see that coming back to hurt you in a business.

When you are in a growth mode and growing square footage and committing to inventory, in some respect in that process, there's inventory -- there is never enough inventory because you are growing so fast and you are adding square footage above your plans.

But in the case where you start to see some contraction in the business, where you start to see some softness as to what has happened in the last 18 months, that is how inventory builds and you can't react to it as quickly.

So that was the biggest surprise and opportunity that we've seen to get out to really bring some of the planning systems and disciplines that we have here that I think will help more efficiently run the business and potentially allow for more margin, gross margin opportunity as we go forward, not from lower cost, but from a better flow of inventory.

Okay, that's helpful.

And I guess from a sourcing perspective, are you going to be changing some of the sourcing infrastructure from a factory perspective?

Will you be moving over some of the former Calvin Klein businesses to any of your Tommy Hilfiger factories or how will you be thinking about the refinement there?

No, I think you will see refinement on both sides.

The sourcing team at Warnaco in the Far East was very strong, a long experience.

There are some real -- there are some positive things there that we can take advantage of and on the flip side, there are some real opportunities to -- again, I want to be clear.

It is not necessarily about lower cost; it is about quicker response times, shorter leadtimes that we think will really improve the efficiency of the business.

So this is not about taking all woven shirts and male woven shirts and squeezing another $0.25 out of that.

I think Warnaco did a strong job of negotiating low cost, but I think where the miss is, I think there is more opportunity sometimes to pay a little bit more for goods with a better factory and sourcing base that delivers you more flexibility and ability to react to business both from a fashion point of view and from a flow point of view to get your markdowns under better control.

And I think that is what we really see as the big opportunity.

Thank you, that's helpful.

And then just one last question.

As you think about kind of investing a little bit more this year from a talent perspective, are there any kind of key adds you are still holding, a business that you are still waiting to hire into or where should we be thinking about some of the pockets of opportunity in developing or hiring in some new talent?

Yes, look, the two biggest holes in the business, and they have been there now I guess 9 to 15 months, is the regional president/managing director in Europe for Calvin Klein.

That business has been opened.

That is a key position and I don't know how you have a turnaround without strong leadership there to really run it and in a similar way, in Asia, the regional president/managing director position has been open for 9 to 12 months and we are aggressively out performing a search, trying to bring in very strong talent there, looking for, particularly in Asia, retail expertise, as well as brand expertise to bring into that part of the world.

We have got a very high-quality management team in Asia country-by-country, China, Korea and Southeast Asia, as well as a strong group function.

But really need the leadership on the ground to really bring that all together.

They could really help each of the country managers more efficiently operate their business.

Those are the two key hires that are missing and have been open and I think have caused some of the issues that the brand is dealing with.

Thank you very much and best of luck.

Thank you.

Howard Tubin, RBC Capital Markets.

Thanks, guys.

Maybe just one final question on Tommy Hilfiger in North America.

It seems like you have done a great job elevating the brand here through your catalogs and your fashion and the advertising you have done.

How do you leverage that?

Is there a price point opportunity at Macy's or an opportunity to open more standalone kind of flagship stores in North America?

Well, I think the way we have leveraged that is our average unit retails over the last three years have moved from below $30 to close to $35 in sportswear.

That is a 20% increase over a relatively short period of time.

That has been key.

I think clearly the demand that has been created, the kind of comp store growth that we have seen of double-digit growth since the acquisition in North America clearly is a big piece of that.

And the kind of margins today that we are reporting in North America that are 14% operating margins in North America, I think that is, to me, the best evidence that these marketing investments have paid huge dividends.

I think the key -- what is terrific about that is the 14% operating margins or the almost 14% overall Tommy Hilfiger operating margins is about 13.6% overall.

Those operating margins include significant investment in advertising that we have made.

So the thing that we have been able to do is grow the business, expand the profitability and invest and grow the advertising and marketing commitments of the brand.

I think being able to accomplish those three things has been key and allow us to continue to grow the business at both wholesale and retail in North America.

Next question.

Steve Marotta, CL King & Associates.

Good morning, everybody.

Very quickly, most of my questions have been asked and answers.

Of the $0.40 delta in EPS from the Warnaco acquisition specifically cited those six investment areas.

Can you talk about -- is any one disproportionate with the other?

In other words is eliminating surplus inventory a bigger drag than any of the others?

I think the -- guess I would say is the amount -- the biggest surprise was the amount of open positions in the business.

The hiring freezes that were put in place over the last 12 months that we lifted immediately really put pressure on the business.

That was a big surprise to us.

Seeing as many open positions in Asia, Europe and North America as we did, that was the biggest surprise and having to deal with the fact that year-over-year having to put those bodies, those positions back into the cost structure and the pressure that puts initially on the business, just the right thing to do, but having those open for so long a period of time has really put pressure on the business.

That's very helpful.

Thank you.

Dana Telsey, Telsey Advisory Group.

Good morning, everyone.

Can you talk a little bit about the steppingstones that we should be watching over the next few quarters as you make your way through the balance of the year?

And then, Manny, as you think about 2014 and beyond, the 15% plus earnings growth that could be achieved, how do you think about the base business versus Warnaco?

Where do we see it?

Thank you.

Thanks, Dana.

Let me take the last part first.

I think it is going to become more and more difficult, if we do our job right, to really tell the difference between the base business and the Warnaco business.

If we integrate this the way it is supposed to happen, the two businesses are going to come together and you should be able to really view what I would say the Calvin business through the lens of much more clearly going forward to really look at a business that has been a license business, which comes with it significantly lower revenues, but outsize the operating margins.

It is not comparative to any other brand in the industry because of that fundamental model.

By changing gears, I think not only can you compare it to the Tommy Hilfiger business and how it performs, but you could also really compare it to other brands as you all see fit.

It will be a much clearer picture to look at the operating margins and have licensing as a key component, but not the sole driver of the business.

I think what you're going to see as you go forward, you are going to see us consistently growing our top line as we take businesses -- as we take these businesses in and our operating margins really moving more towards the Tommy operating margins over a period of time.

And that will be key to watch as we go forward with that, with the nuances between the two brands geographically.

I think the key issues for me, I think you will hear us talk about it, we will be clear to talk about is where the profit drivers in this acquisition will really come out of Europe and Asia principally.

We have very solid businesses and we don't see anything changing in Latin America.

The North America business I think will get enhanced, but it is already a big business and profitable.

The underperformance in Europe clearly starting to see that business start to turn around will be an indicator of how this whole process is moving and Asia maintaining its operating profitability while at the same time initially slowing the growth a little bit, but then really kicking in the growth as we go forward.

I think those will be the key drivers of the business.

The base business, I think -- I don't see any reason the next -- look, 36 months, we continue to see the Tommy Hilfiger growing top line mid to high single digits.

If we grow the business mid to high single digits, we can grow the earnings 15% to 20% there.

That is a healthy business.

We think the European business continues to have opportunity to grow its operating margin expansion as we have layered on some of these new businesses.

Taylor and some of the others, some of the startup costs get behind us as we go forward.

Those businesses will kick in more efficiently, so I think the Tommy business is very healthy and I think we need to watch the Heritage businesses.

We are going to look at that whole portfolio.

It is going to represent 25% of our sales and 15% of our profits.

So it is a small component, but we will continue to look at that business and make decisions about running that business from a cash flow operating point of view and look for opportunities to enhance that overall model.

Thank you.

Operator, I think it is now almost 10.30.

We are going to take one more question and then call it.

We have got an acquisition to integrate.

It appears there are no more questions at this time.

Okay, perfect timing.

Thank you very much.

We appreciate everybody's time for the call today and we look forward to speaking to you in late May, early June with the first-quarter press release.

Have a very good day and a happy holiday.

This concludes today's conference.

Thank you for your participation.