PVH Corp (PVH) 2013 Q1 法說會逐字稿

Good morning, everyone, and welcome to the PVH Corp.

first-quarter 2013 earnings conference call.

This webcast and conference call is being recorded on the half of PVH and consists of copyrighted material.

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

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

The information made available on this webcast and conference call contain forward-looking statements that reflect PVH's views as of June 12, 2013 of future events and financial performance.

These statements are subject to risks and uncertainties indicated in the Company's SEC filings in 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 rights to change its strategies, objectives, expectations and intentions and its needs to use significant cash flow to service its debt obligations.

Therefore the Company's future results of operations could differ materially from historic results or current expectations.

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

Generally the financial information and guidance provided is on a non-GAAP basis as defined under SEC rules.

Reconciliation of GAAP are included in the first-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 the release.

At this time I am pleased to turn the conference over to Mr. Manny Chirico, Chairman and CEO of PVH.

Thank you very much.

Good morning, everyone, and welcome to our call.

Joining me on the call are Mike Shaffer, our Chief Financial Officer; Dana Perlman, our Treasurer, Senior Vice President of Investor Relations; and Ken Duane who runs all of our wholesale businesses in New York and our Heritage businesses throughout North America as well as all of our wholesale businesses throughout North America.

Just some general comments -- we are very pleased with the first-quarter results.

We significantly beat our first-quarter revenue and earnings guidance.

We saw strong outperformance against our projections in both Calvin Klein and Tommy Hilfiger businesses, as well as in our Heritage wholesale businesses.

We are going into the second quarter with a significant amount of momentum.

Let me start with the Tommy Hilfiger business to give you an overview.

In the Tommy Hilfiger business we continued to see strong performance during the quarter posting a 5% revenue increase and a 15% operating income increase over the prior year.

In North America, revenues are up 14% driven by a 5% comp store increase at retail, square footage growth in our retail business and overall very strong performance in our wholesale businesses.

We continue to see momentum in the North American business and strongly believe that the significant investments that we are making in product, in our stores, in shop presentations and in our marketing program are paying huge dividends for us.

Second-quarter sales trends to date are strong; we've seen our retail sales comp performance accelerate posting an 8% to 9% increase so far through the second quarter.

Moving to the international component of the Tommy business, revenues were flat for the quarter.

Revenue growth in Europe was offset by continued weakness in our Japan business.

Our retail comps in Europe posted a 4% increase.

Looking at the second-quarter sales trend Europe comps continue to run up about 3% to 4%.

We also see our fall and now our holiday sales bookings coming in at about a plus 10% growth over the prior year.

Geographically we continue to see strong growth in Central and Northern Europe with particular strength in Germany, France and Russia, partially offset by softness in Southern Europe, which would be particularly Spain and Italy.

Moving to our Heritage businesses, our wholesale Heritage businesses continue their strong performance.

Sales came in ahead of our estimates as strong spring selling resulted in our wholesale customers accelerating shipments into the first quarter.

We also saw strong performance in our newly acquired Speedo and core intimate business units.

Overall first-quarter operating margins dramatically improved to 12.8% for the wholesale Heritage businesses.

This margin expansion resulted from a significant improvement in sportswear margins driven by strong sell-throughs at retail and higher average unit selling prices.

Second quarter sales trends have continued to be strong in May and inventory levels are quite clean.

We are well positioned for a strong Father's Day and overall second quarter.

Our performance in our Heritage retail business -- businesses was disappointing.

Comp sales were minus 7% and we were particularly week in our Bass division.

Second-quarter sales trends continue to be soft and we are not anticipating any significant improvement in this business until we get to the third quarter back-to-school selling season.

Moving to our Calvin Klein business; our Calvin Klein businesses exceeded their sales and earnings estimates in the first quarter.

We posted strong sales gains and higher than estimated operating margins which were approaching 16.5%.

By region we saw the strongest results in South America, Asia and North America.

The South American business was very strong particularly in Brazil where we continue to see sales growth of about 10% driven by the strong performance of Calvin -- of the Calvin Klein jeans business.

The Brazilian business is principally a wholesale business.

And as we look at our fall and holiday order book, that book is running up about 10% as well, so there is good momentum in this business as we go into the second quarter.

Asia we saw very strong performance in China and Southeast Asia where comps were up about 5%.

Wholesale sales also exceeded our projections as our franchisee partners accelerated their shipments into the first quarter in order to meet consumer demand.

The only difficult market in Asia continues to be Korea where comp sales were running down about 10% in the first quarter.

Second-quarter sales trends have improved as new product has hit the sales floor in Korea and May comp store sales for Korea improved to about down 5%.

Moving to North America, our North America business continues to perform very strongly across the board in all product categories with the exception of men's and women's jeans.

We've seen very strong performance in our wholesale men's sportswear and our men's and women's underwear businesses.

In addition, our North American retail business posted a 4% comp store sales increase and higher operating margins due to better sell-throughs at higher average retail selling prices.

The second-quarter trends in these businesses continue to exceed our sales plans, and quarter-to-date comps are up in the mid-single-digit range in our retail stores for Calvin Klein.

The Calvin Klein jeans business in North America and Europe continues to be only difficult business.

We have planned these businesses down for the year about in the mid- to high-single-digit range and they are performing at about that level.

We continue to have initiatives in place to turn this business around; I will talk about a little bit more toward the end of my comments.

And we are optimistic as we look at this business as we start to turn into spring 2014 as we start to see new product initiatives come through and start to make investments at point-of-sale in North America and Europe to really improve our presentations with our key customers.

In the licensing area ongoing royalty revenues were up about 4% in the quarter due to strength in handbags and accessories and our women's apparel businesses which are operated by G-III in North America and Club 21 in Asia.

Our fragrance royalties for the first quarter were flat.

This year our key marketing initiatives are all second half weighted; we have a major women's fragrance launch planned for the fourth quarter.

The fragrance is called Downtown and our celebrity talent is Rooney Mara.

You will be hearing a lot more about this launch in the third quarter and, as you would expect, there was a major marketing campaign around the fragrance launch which will not only we believe help our overall fragrance business to continue to grow, but also help the overall Calvin Klein brand franchise.

Let me quickly give you a brief update on our integration of the Warnaco businesses into PVH.

We've owned the business now for just about four months.

We continue to validate our plans and are on track with all our processes and conversions.

Over the next three months we will see some significant system conversions in North America and Europe.

There have been no surprises in this area since the last time we updated you and we are very comfortable with the timetable we have in place today for the integration of this business.

From a people perspective we have our senior management team in place across the globe.

The final piece of this process was put in place early this month; we had a restructuring of our jeans design group from a centralized team based solely in New York to a more regionalized structure with centralized design direction from New York.

This structure is consistent with the way we operate design for all of our other Calvin Klein product categories.

We believe it is imperative to have design closer to the consumer with regional design hubs based in Europe, Brazil, Hong Kong and New York that can quickly react to the trends that they see in the business and react to sales trend that they see both at wholesale and at retail.

And with that I'm going to turn it over to Mike to quantify some of what I have said.

Thanks, Manny.

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

Revenues for the first quarter were $1.94 billion or $40 million over our guidance, or 36%, or more than $500 million greater than the prior year.

Driving our revenue [beat] was strong performance in Calvin Klein Asia and Brazil where second-quarter wholesale shipments were advanced to the first quarter coupled with strong performance in our Calvin Klein and Tommy Hilfiger North America retail businesses.

Comparing to last year revenues were significantly impacted by the Warnaco acquisition.

Earnings per share for the first quarter was $1.91 which was significantly higher than our previous guidance.

Included in our first-quarter earnings is $0.17 associated with favorable discrete tax items planned in the second quarter that were recorded in the first quarter.

The first-quarter earnings per share beat was also impacted by strong revenue and gross margin improvements in our Tommy Hilfiger and Calvin Klein North America retail businesses.

In addition, our first quarter was favorably impacted by an acceleration of wholesale shipments into the first quarter that were planned in the second quarter, particularly in our newly acquired Calvin Klein international businesses.

At this point in time we believe it is premature to adjust our full-year earnings estimate given the short amount of time that has passed since the Warnaco acquisition and the complexity of the integration, we are maintaining our full-year earnings per share guidance of $7 where the second half of the year will be heavily influenced by additional investment and expenses associated with rebuilding the Warnaco jeanswear and underwear businesses.

Our revenues for 2013 are projected at $8.2 billion, Calvin Klein revenues are planned at approximately $2.75 billion, Tommy Hilfiger revenues are planned at about $3.4 billion and Heritage revenues are planned at $2.05 billion.

Year-over-year comparisons for Calvin Klein and Heritage Brand revenues are significantly impacted by the Warnaco acquisition while Tommy Hilfiger is projected to grow approximately 6% despite the impact of a weaker yen.

I wanted to put some color to 2013 operating margins for the Company and our businesses.

Operating margins for the year is expected to be approximately 12%, a 40 basis point reduction to 2012.

Driving this overall reduction is the switch from running a licensing model to direct operations of the Calvin Klein jeans and underwear businesses combined with our initiatives and the expenses associated with rebuilding and investing in the acquired Warnaco businesses.

For the year we are projecting our Calvin Klein operating margins to be about 15.5%, Tommy Hilfiger operating margins are planned at about 14% and Heritage brand operating margin at about 8%.

We are planning a full-year tax rate between 25.5% and 26.5% and full-year interest expense at approximately $200 million.

For the second quarter we are projecting revenues at about $1.9 billion and EPS to increase 5% over the prior year to $1.35.

Operating margins for the second quarter are expected to be about 11%.

Taxes for the second quarter are planned at 30% to 31% with interest at approximately $50 million.

Our debt pay down remains at about $400 million.

Lastly, as Manny said, our integration plans are on track, our synergies remain targeted at $100 million and we are comfortable with that number.

For this year we are looking at $25 million and we are looking to grow about $25 million per year thereafter.

And with that we will open it up for questions.

(Operator Instructions).

Bob Drbul, Barclays.

Manny, I guess the first question that I have is with these better-than-expected results, when you think about the $7 number that you have out there, would you accelerate further expenses into this year or is it important that you could let some of the better-than-expected core results flow higher?

Sure, Bob.

I don't think it is a question about accelerating expenses.

I think we have the budgets built and they are all put in place.

What it's really focused on is the comfort level we get as we are operating this brand-new business and understanding the seasonality of that business a little bit better and getting the confidence at this point that we can start to roll through some of the beat.

I think we have to be honest with ourselves -- when we looked at how we estimated the first quarter it was clear to us we were being very conservative in that estimation and dramatically beat it.

So there -- I think a fair amount of the beat or a good portion of the beat was timing.

But there is no denying the fact that as our wholesale customers are pulling goods forward that that is positive hopefully from a sales trend point of view as we start to get the orders to come through for fall and holiday that we could see some permanent improvement in sales trends that stick with us.

And secondly, obviously getting the goods on the floor earlier can only help the gross margins getting more regular price selling.

So all those things are very positive and make us -- give us greater confidence today than perhaps two months ago when we announced the fourth-quarter results.

So I think we are on a good trend and we just want to see some more visibility as we go forward and we don't want to get too far ahead of ourselves with our guidance.

And the last point I would make is -- and I've made this point consistently for the last two or three months -- is 2013 as we look at it is a true transition year.

We have got a major acquisition that we are getting on board and the fact -- speaking frankly, the fact that we make an extra $0.10 or $0.20 a share is not as important as that we are well positioned for 2014 to really get back to our normal growth rates of 15% to 20% for the next three years.

And that's important for us as we go forward.

So I think that is how we look at the guidance, we think we are being prudent.

And obviously as we get through the second quarter and get better visibility we will try to be as transparent as possible about it.

Just two more questions.

In the back of the year what are the big expenses that you will be incurring especially around the Warnaco piece?

And it sounds like you filled the open positions that you had within the Warnaco business.

Can you give us some more detail in terms of who you hired on those key positions that were open when you completed the acquisition?

Sure.

Look, I think a couple of things.

The investments continue to be in the areas where we laid out in great detail a couple of months ago.

It is in people, it's in product, it's in the design area, continue to build and really putting the goods in product and in presentation, both our own stores and in -- both in our own stores and in our key department store accounts to really improve that overall presentation.

Those investments have started.

On the people side, we've with made some progress in hiring people, but there are still some very key positions around the world that need to be filled.

We still are -- and we are in the midst of interviewing for the head of our Asia region for Calvin Klein and also for the head of our European business as we go forward.

And planning areas and filling those positions are just starting to be filled.

So those positions will come on board and are all factored into our guidance as we go forward.

So I think that is where we will see -- we will see the investments being made.

We are also focusing in -- we've talked about closing unproductive stores.

That is a process that is ongoing and we will continue to do that as we go forward and balancing -- the biggest issue that we really need to deal with is balancing our sales mix and distribution both in North America and Europe where, in the jeans area, we are over distributed into the secondary channel, be it clubs and the off-price and we've been trying to bring that into balance as we grow the department store business and thoughtfully shrink the profitable off-price business as we go forward.

So we are doing that in a very thoughtful way as we go forward, but those -- those are the levers that we will be pushing in the second half of the year.

Thanks, Manny, good luck.

David Glick, Buckingham Research Group.

I just wanted to focus in on the Calvin Klein jeans business, because clearly that is really the key to your creating significant value for your shareholders around the Warnaco acquisition.

And now that you have owned the business for three or four months can you give us some color on some of the initial conversations you've had with your key partners in Europe and the US about how you see the pace of the business moving forward?

And kind of help us benchmark what kind of progress we should see when in terms of obviously the product improving, which it sounds like spring of 2014, but when we should see shops repositioned and price points begin to move up a bit and hopefully see a less promotional business.

And then also how the pace of your reduction of sales to the off-price channel.

Okay.

So I think you have to look at it this way.

From a product point of view we are presenting to the market in the next -- just recently and continuing to present to the market both here and in Europe the product for spring 2014.

Initial reaction has been very positive.

There are some -- we have some key benefits that we have and uniquely position us as we go forward.

We have a great deal of credibility both in North America and in Europe with our retail partners in our ability to deliver quality product, to present product well, to service that product in retail.

We do it across the board here in the US with all of our labels, but in Calvin Klein we do it consistently in men's sportswear, we support it in our retail stores, we do it very well with our partners -- licensing partners here, our underwear business continues to be very strong.

And just as a way as an example, if you were -- the jeans business, which in the US is down double-digits, even with that double-digit decline in our retail -- in that jeans business we are seeing our wholesale businesses up with our key department store accounts overall high-single-digits.

So the Calvin Klein brand has a great deal of credibility with the market and the management teams both here in the United States and in Europe, with what they have been able to deliver with the Tommy Hilfiger product, have significant credibility with the market.

So it gives us a significant amount of confidence about turning this business are around.

The challenge we are going to be dealing with is for 2013 we are just not going to be in a possession to have dramatic improvement in the product.

We are trying to tweak the fall and holiday product as we go forward, but it is more important that we keep moving it.

It doesn't make sense to start investing at point-of-sale and in marketing until we get in a position to have the product to support that.

So for us in jeans the turnaround we see is all 2014.

For 2013 numbers that we are using we think are -- we are comfortable with, we think they have been secure.

And that balancing of the off-price channel I think will start in the third and fourth quarter of this year and will continue into next year and we will be very thoughtful about how we deal with it.

And then a follow-up -- it's interesting that you are going back to a regional design structure for Calvin Klein jeans.

Can you help us understand how that differs with Calvin Klein underwear and are you -- my recollection is that was centralized.

And what are the differences in the two businesses, why it is more important to be a regional design hub and merchandising hub for jeans versus underwear?

Sure, okay.

It is a great question.

And some of this is -- to be brutally honest; some of this is what your management teams are comfortable with running.

Operating structures can work in different environments for different companies as they go forward.

For us, given the price positioning of the Tommy brand and the Calvin brand, how we are positioned here in the states where just by the nature of our premium position here, our out-the-door retails are on average $40 to $50 here in the states where in Asia, Latin America or Europe our out-the-door retails are approaching to $90 to $100.

So it is -- although it is a very coordinated design effort, it is separate lines that we utilize to really exploit all of the markets, trying to be very focused on the needs of those markets while keeping consistent with the DNA of the brand.

When it comes to underwear, historically that has been a global line that has been marketed to the consumer on a global basis, and has been consistently merchandised across the globe to the consumer at that level.

So there is a long history of this working.

We make -- there are differences between North America and the Asia line from a point of view of the weight of different product categories, but it all comes out of the same line.

So there it seems to work for us very well, it has been consistently working for us in that area and we believe that there is no reason to change that at all and to keep that leverage and focus we have.

But when it comes to jeans, very similar to our men's and women's sportswear efforts, we think the regional approach just is what is right for PVH to operate and what works for us in all of our other product categories.

So we just found the structure foreign from that point of view.

And I think this will give us the ability to react more quickly on a regional basis.

It will give us the ability to move as appropriate in each of the markets and not have to do it from a global point of view.

And I think tactically that will position us better both in Europe and North America particularly.

Great, thank you very much.

Good luck for the rest of the year.

Christian Buss, Credit Suisse.

I was wondering if you could talk a bit about the European business and how you are thinking about the progression of that business over the balance of the year in your guidance both for Tommy and for Calvin Klein.

Okay.

Let me start with Calvin Klein business.

We are planning that business in Europe down high-single-digits, we are planning it at low operating margins overall.

We have a profitable well working underwear business and we have an unprofitable jeans business in the two businesses.

We are not looking for any significant improvement in the trends of that business through fiscal 2013.

The improvement that we are expecting in the jeans business both in North America and in Europe starts in 2014.

We think that is a prudent way to plan it and we are not trying to get ahead of the trends given where we believe the product is positioned and how quickly we can have an impact presentation at retail.

And in Europe actually -- we are in the process of really looking very hard at closing 25 to 35 stores and that is going to be a process that is going to take about 18 months and will probably start in earnest in the second half of this year.

So I would not expect a significant improvement in the Calvin business in Europe as we go forward.

On the Tommy business, the business has continued to perform, as is obvious by the numbers.

Our retail trends have been in the low-single-digit area for the last six months and we believe those trends will continue.

However, we have seen an acceleration in our wholesale bookings initially first in fall where orders were coming in at about a 10% rate and now with the holiday season coming in at also a 10% increase.

That's in comparison to where we saw the fall -- the previous fall and spring season coming in closer to a 3% to a 4% increase.

So clearly that portion of the business continues to accelerate.

We're seeing strong growth there.

And I would think the overall performance in the Tommy international business will continue to improve from the second, third and fourth quarter sequentially as we go forward.

Thank you very much.

Could I also ask on the inventory side, could you talk a bit more about the clearance activities this quarter and where you feel you are positioned going forward?

Are there any pockets of excess and where do you feel best about your inventories?

I feel very strongly on the pre-existing PVH businesses, the inventories are in excellent position and we are -- we don't see any excesses both obviously in our own balance sheet, but also we don't see any pockets that are out there that need to be dealt with in our department store accounts here in North America.

As we move to the newly acquired Warnaco businesses, the underwear business for the most part is clean; we don't see any real excess inventory build there that needs to be dealt with.

The Speedo and core intimates business, there are no real excess inventories that need to be dealt with there of any size that would be visible to you.

But finally, the jeans business, there are pockets that we are over inventoried in.

The Asia business, our franchisees' partners were over inventoried; we made a commitment and we have taken that inventory back.

We've taken some of it back already in the process of pulling it back and bringing it into really open that pipeline so we can get fresh goods into it.

That has really started the latter half of the first quarter into the second quarter and should continue as we go forward.

In North America we found some excess inventory that is also being dealt with and we expect that all to be cleaned up by the end of the third quarter of this year.

And if I could just add we've -- obviously on the financial side we've taken appropriate reserves where we have to.

And on the Bass side we have taken the necessary markdowns where that business hasn't been performing.

That's helpful.

Thank you very much.

Congratulations and good luck.

Kate McShane, Citi.

Manny, I think before we heard from you today there was a bit of noise just from others in the industry talking about the weaker spring because of the weather.

And I wondered if you could help reconcile some of the strength that we saw in your business versus some of the trends that we saw in spring.

And how much of your overall revenues were impacted by shifts out of Q2 into Q1?

Okay.

I think when you look at our businesses, our retail businesses in North America and in Europe were clearly impacted by the unseasonably cold spring weather.

Nobody wants to play weatherman, but you don't have to be a genius to just look at it and know it had a negative impact on the business in March, April and early May.

To reconcile that, just to keep some of the numbers in place, although Calvin and Tommy performed well at plus 4% and 5% in the quarter in North America, the trends that you really looked at what was going on in the third and fourth quarter -- in all of 2012 the trends were much closer and Tommy was running double-digit increases and in Calvin we were running high-single-digit increases.

So the trend did come off of where we were trending and I think we would have been closer to -- I don't know what the comps would have been, but clearly they would have been higher.

And there probably would be less promotion in the market in April, May and June if we weren't dealing with such unseasonably cold weather.

In Europe it's impacted our retail businesses.

Clearly we had a lot -- we had significant momentum in our retail business in the third and fourth quarter of last year posting high-single-digit increases and to go down to about plus 3% is clearly a little bit disappointing given the trends we had.

But it is very clear to see that the weather has had an impact on that business as well, particularly in Northern and Central Europe where the trends have been so strong.

So that is how we have looked at the business, even our Heritage businesses, clearly there we really think the weather was a big impact on our business at minus 7%.

So it had an impact, but I think we have weathered the storm and got out of it and are well positioned from an inventory point of view as we go forward.

And then if you could just quantify overall how much you thought your revenues benefited from the shift of sales that came in Q1 out of Q2?

Well look, I think it is somewhere in the range of $30 million to $50 million.

Okay, great.

And then my second question is around supply-chain.

Again, it's another area where we are hearing a little bit more about higher labor costs.

And even though this is an ongoing trend I wonder if there was any updates, especially with the acquisition of Warnaco, about doing anything differently with your supply-chain to further efficiencies?

Well look, I think the focus on the supply-chain is to integrate the Warnaco businesses onto the PVH platforms, which I think will benefit responsiveness to market, timeliness to market, cycle times, much -- and with less of a focus on just pure cost of product.

I think there is huge benefits to being able to get back into product quickly, to be able to react to trends, which I don't think the business is really capable of today.

So that has been our focus.

Look, in the sourcing, what I can tell you is product costs on — in general for the spring season as we go into the fall season are just relatively flat.

I mean we could start talking about labor costs up, product cost down -- raw material cost down slightly, mix of sourcing -- there is a whole plethora of things going on.

And clearly there is pressure out there as we think about 2014 and beyond given some of the human rights situations around the world particularly Bangladesh and other areas.

But at this point it would be premature to talk about any of those things.

And I don't have great visibility beyond the fall season on where costs are heading.

So I think the initiatives we have in place on the supply-chain side is really a focus on timeliness to market and getting product on a more timely and taking the supply-chain cycle down dramatically, particularly for jeans and underwear, so we can react to trends in our retail stores.

Thank you.

(Operator Instructions).

Erinn Murphy, Piper Jaffray.

Manny, I was hoping just that you could focus a little bit more on -- you commented on the strength of both Brazil and China for the Calvin Klein jeans business.

Could you just maybe help us appreciate, is that more kind of how these brands are particularly -- or the brands are particularly positioned in these regions?

Or is there a broader macro trend that you are seeing in both of those regions?

And then secondly, you related to the Tommy Hilfiger bookings in Europe being nicely strong, up 10% both in the fall and holiday period.

You highlighted in your prepared remarks Germany as being strong.

If we were to parse out kind of Northern versus Southern, could you help us think about that dynamic for the bookings?

And then in terms of category strength for the Tommy Hilfiger bookings in Europe, is there anything to call out that seems to be outperforming the group and from a category perspective?

Thank you.

Okay, let me deal with the Tommy businesses because I think that is the easiest one to quickly give you a sense.

Look, when you think about the big businesses in Southern Europe that are under pressure for the Tommy business continue to be Italy and Spain.

There's businesses are down in general, high-single-digits to low-double-digits, with Italy being under more pressure than Spain at this point.

Despite that we are seeing significant growth in Germany, UK, France and Russia that is offsetting that.

So clearly it is double-digit increases in those Northern and Central markets.

From a product category point of view -- the strength continues to be men's sportswear and women's sportswear as we go forward.

Those categories continue to do very well, as well as our tailored business -- dress shirts, neckwear, suitings and the related categories that go with that.

That is a new category for us that has come on very strong and that we are seeing significant increases in as we go forward.

So those would be the broad categories.

Footwear continues to do well for us and the accessory business at Tommy, which is relatively small, continues to grow well for us.

But when you put it all together those are the areas on the Tommy side I think going forward.

On the Calvin Klein businesses when we talk about China and Brazil, a lot of the dynamics have to do with the fact that we are so well-positioned in those markets.

I think guys if you think about Brazil and if you travel it, and if you -- what I think you will see from most international brands, the European and American designer brands, you will go to Rio and Sao Paulo and you will see a couple of flagship stores, but I don't think you will see the depth of business that we have in Calvin Klein.

We have a very strong wholesale business there with a specialty store account throughout the country that has been built over a 10-year period.

And is not easy to do, it's not easy to source product in that part of the world and bring it in with the duties and tariffs you have to deal with, so you have to manufacture close to market.

So we have a tremendous advantage with the organization we have in place for Calvin Klein in Brazil and the management team that we have in place that there are really able to execute so well.

We have really focused on as we go forward, 2014 and beyond, expanding the product categories.

Because Warnaco basically had jeans and underwear and nothing else.

And we kept that very tight.

So we are looking to bring more sportswear into that market beginning in 2014, footwear product categories and really expand the Calvin Klein brand offering as we go forward.

So I think the 10% kind of growth that we're seeing is just the tip of the iceberg, that's a dynamic market.

It is still only $150 million in wholesale sales, so there is significant growth opportunity available to us in Brazil as we go forward.

In China the brand, again, is very well-positioned.

It's had double-digit growth for the last four years.

We have slowed that down because we've slowed down some of the square footage growth.

As we have taken the business on we want to stabilize the business and bring it on, but it continues to be a very healthy for us, growing overall probably double-digits in China -- low-double-digits given the comp store increases of about 5% coupled with square footage growth and the wholesale growth in that channel as we go forward.

In a similar vein we are looking in 2014 and beyond to really expand some of the product offerings there as we go forward.

So there are significant opportunities in two dynamic markets for us that are growing very fast where the Calvin Klein brand is very well-positioned.

I just have a quick clarification actually on a former question on the transition from the centralized to the regional structure for the Calvin Klein jeans.

And I'm sorry if I missed this.

Are the people put in place if you think about the regional structure for Europe, Brazil, Hong Kong or New York?

Or is that going to be an incremental kind of team building piece of the initiative in the second half of this year?

Thank you.

A lot of what is happening is we are taking the existing centralized team that is in New York and really spreading that out around the globe.

We are also taking advantage of the Tommy Hilfiger design talent in Europe to really -- that will be supplemented as we go forward.

And we were in the process of building a design hub in Asia as we go forward and that is in process.

So I would say 85% of it is in place as we go forward and will be supplemented as we go forward.

But I think we are very well staffed there; we've got great talent in that group.

The product has really continued to move forward for spring 2014.

Karyn Hillman who was with that has really moved the group forward and I think we are in a position to take that forward in a way that will make us more efficient from an operating point of view.

Great, thank you, and best of luck.

Eric Beder, Brean Capital.

Congrats on a great quarter.

Can you talk a little bit about -- two things here -- Tommy Hilfiger?

I'm curious -- what is the status of the shift over in Japan?

I know that is a material change.

And are you -- and what has been the focus here in the US in terms of potentially rolling out full price Tommy stores outside of this department store channel?

Okay, in North America we have a chain of about 20 specialty stores that we operate.

It's marginally profitable.

It seems to be working.

We have opened up a test of about -- I think it is now three stores, new stores that will be open this year.

The test is early on.

We think it is great for the brand.

The stores I think really present the best of what Tommy has to offer in a way that is very brand appropriate.

So we love it from a branding point of view and I think you will see some more of these as we go forward.

If we really -- we are not in any way calling that we think this is a huge growth opportunity for us or a huge profit opportunity for us yet, and that is what we are really testing, to see how this will play itself out.

So I think it is just -- it continues to be very much enhancing for the brand in North America.

In Japan the business continues to be under pressure.

We continue to focus the brand from a positioning point of view more consistent with the European position as we've really positioned the rest of Asia.

The Tommy business in Japan has been there for almost 20 years, so it has some of the -- it continues to have some of the legacy of what existed and some of the confusion around the brand as far as the urbanization and the big logos and some of the issues that we dealt with.

So Japan is like this pocket business, $250 million, it is marginally profitable that if we can get right could be bigger and could be significantly more profitable, but it's -- for us it's critical that we get the brand positioned appropriately in market because Japan, as a fashion leader of Asia, particularly Tokyo, it is critical that the brand represent what we want it to be in all of Asia so that we are able to really get the growth that we are going after in China, in India, and the rest of Southeast Asia, which we think has big growth -- future growth opportunities for us.

But in order to really totally be able to capture all of that I think Japan from a branding position needs to be appropriately positioned.

I think we are appropriately positioned today, but the consumer is still in Japan trying to understand us, it is going to be a process and I think it is a long-term process.

And I think we have it planned appropriately, we've taken the hits in 2010 and 2011 to reposition it.

And I think at the level profitability it is today it is part of a blend that gets us to a 14% to 15% operating margin.

So it is there and I think we could start to see some improvement as we go forward.

Okay, in terms of Calvin Klein, so now you control the brand entirely in the US.

When you look at how you are positioned in department stores, as the entire presentation becomes more I guess uniform as Calvin Klein jeans kind of moves up the ladder to where it should be, what is the opportunity in department stores to get something like a shop-in-shop or deeper positioning that is now than you have somewhat of a more cohesive focus in terms of all the product and potentially in terms of the advertising?

Well, I think that is -- you basically laid out the whole strategy.

It is really to do that in jeans to get the consistency in jeans in line with what we do in men's and women's sportswear, what we do in handbags and accessories, what we do even in underwear where we think there could be improvements in presentation, but even there the brand is much better presented.

It is a challenge to find the Calvin Klein jeans on the floor especially in B doors throughout the United States.

And we have really -- we really need to step that up.

So I think given the performance of the brand overall and the iconic positioning of the Calvin Klein jeans as a product category in the house of Calvin Klein, there shouldn't be -- if we deliver on the product and execute well and if we make the investments at retail there is no reason why this should not work.

And we are very confident about that, it just takes time.

It is what we have done in men's sportswear building it from zero to a $200 million wholesale business.

It is what we have done with our partners at G-III and all of our women's businesses from zero to over $1 billion in sales today.

So I think we know the playbook, we know the formula that makes it work, it's a product category that we clearly understand and it is one where we have a right from a brand history to really own and to be significant in.

And it is one -- and if you just go back three to four years, Calvin Klein had a leadership position in North America.

And there is no reason why we shouldn't get that leadership position back.

So it's in the works and I think you will start to see it over the next 24 months.

Great.

Congratulations.

Thank you.

Evren Kopelman, Wells Fargo.

Congratulations.

Two questions on Tommy.

In North America the wholesale business, kind of give us an update where we are in your efforts to improve the average selling price.

And also remind us when the exclusive ends with Macy's on the sportswear side.

And then secondly, maybe give us a little bit more color on Tommy Hilfiger business in Latin America.

When should we expect maybe to start hearing from you about more efforts there maybe utilizing some of the Calvin Klein strength in Brazil?

Thanks.

Okay.

On the Brazil side, I think when we talk about China, we talk about Brazil, we talk about Korea potentially and all those markets, we've been very consistent.

That is 18 to 36 months out.

We need to get the platforms up and operating, we think we have the pipeline and the distribution and the knowledge and the management teams in place to take advantage of that long-term.

But I think that is really a 2015 story and beyond and really we'll be focused in on that.

We just signed a joint venture partnership in Brazil for Tommy Hilfiger with a great partner in brands that really understands the retail market and the wholesale market there.

The brand is well-positioned throughout Latin America both in Mexico and in Venezuela, other parts and Brazil is a huge opportunity for us to grow the brand as we go forward.

The first part of the question was --?

North America Tommy AURs, they continue to improve.

They are up mid-single-digits for the season.

It is a continuous process as we go forward to move that on.

I think given -- if the environment, and again we talked about the weather, had been somewhat more cooperative I think we could have seen more improvement in the out-the-door retail prices.

But given some of the promotional environment that is out there in shorts and some of the key categories that have now gotten under a little bit more pressure and are more promotional, we needed to move appropriately from a competitive point of view.

All of that has been factored in.

So we continue to see improvement, we are happy how we are positioned and I think we are set up again for fall to see another increase in AURs as we go forward.

The goal is to get Tommy above $40 and we still have about $6 or $7 to get there.

When is the exclusive end with Macy's?

The exclusive is a long-term arrangement with Macy's; we just re-upped for another renewal period.

In addition to that we've got no intention of moving off of that.

So that partnership continues very strongly.

They are very supportive of the brand and it's a focal point for us on the positioning of the brand as we go forward.

So I don't see any -- no matter whether -- whatever the agreement states, we don't see any change of that in the future.

If I can do one on Calvin Klein in China.

I was a little confused, you've talked about the strength, but I also thought there was a lot of inventory to clear.

And then you said I think your -- can you give us a little bit more color what it is looking like?

Are you ahead of plan in the inventory clearance, is that why you saw some strength?

And give us a sense for the underwear versus jeans business, was there more strength in underwear?

I actually don't know the size of the businesses at all in China.

Just a couple of things.

On the inventory side of the business, again the real inventory issue that we are dealing with is inventory in the franchisees, we've taken that inventory back, a lot of that inventory will be destroyed or donated, we are not putting it back into the channel, we don't want to pollute the Asian market, we're going to be dealing with it appropriately and getting it out.

It is all jeans product; there is no underwear issue at all.

The business is probably 60 — round numbers 60% to 65% jeans and related apparel, 35% to 40% underwear.

Both categories are very profitable for us, whatever.

The inventory liquidation had no issue on us at all from a sales point of view except that our franchisees partners, we have cleaned up their pipeline which will allow them to buy normally and to bring in fresh product in their franchisee stores which will be healthy for the brand, there will be less promotion in the market which we think is critical for the growth market that we are dealing with.

So I think that is, for the most part all behind us and we are moving forward with it.

Next question.

John Kernan, Cowen and Company.

Are you any less confident in the $100 million -- any more or less confident in the $100 million in cost synergies you initially planned with the Warnaco transaction?

How should we think about the timing of when you are able to recognize beyond the $25 million in synergies I think you are planning for in the back half of this year?

So, look, we have gone through first quarter, we validated our plans, we are absolutely on track to attain the $100 million.

For this year we have talked about the $25 million being the number, it is back half weighted.

And as we move forward next year and the year after we will get another $25 million and in the fourth year as well getting to the $100 million.

So we are -- sitting here today we have plans that are absolutely falling into place, integrations where switches will be turned on in the next 90 days, as Manny said.

And we feel very good about our plan synergies.

Great, that's helpful.

And then, Mike, back to the Tommy Hilfiger AUR and the margin expansion that has gone on there, I think the operating margin was up almost 400 basis points year-over-year in the first quarter.

It seems like your guidance for the combined Tommy Hilfiger business international and domestic assumes some of that momentum fades into the back half of the year.

What is driving that and do you think you are being a little bit conservative in terms of the margin expansion for Tommy Hilfiger for the rest of the year?

I think you're talking about North America only, or are you talking about (multiple speakers)?

Yes, I was talking about North America -- operating margin for the first quarter in North America.

The operating margins in the first quarter, they obviously had a strong quarter.

Comps were 5% against the plan of low-single-digit.

So they -- some of that beat was driven by a very strong revenue beat.

So as we look forward we are just not planning those kinds of beats and we will see how the business is trending, better than the plan right now, but we haven't planned those same kind of revenue beats.

So look, a 14% operating margin over last year in the Tommy Hilfiger business was a significant improvement from where it was the year before, which is great.

And I think we are planning about a 50 basis point improvement this year.

And I think at this point that given the configuration of that business being Macy's exclusive coupled with our own retail business I think that is -- that is a pretty good place to be right now.

So getting too far ahead of ourselves I would be cautious about.

Okay, thanks, good luck.

(Operator Instructions).

Howard Tubin, RBC Capital Markets.

Maybe just one more follow-up on Tommy Hilfiger.

Any update you can give us, Manny, on new product initiatives or marketing initiatives for Tommy coming up in North America this fall and maybe into next spring?

Sure.

I think the product expansions, the focus that -- we've got a couple of initiatives in place to really grow some existing businesses, in particular our tailored business.

We think there is a huge -- there is a big opportunity in Europe and there is also a big opportunity in North America that I think will start to capture particularly dress shirts, neckwear and, with our licensing partner, tailored clothing here in the states.

So we are putting in some shop-in-shops around that would really be very brand building and enhancing as we go forward, so we are excited about that.

In the accessory area, that is an area where we continue to grow in our own retail stores pretty significantly and we think worldwide there is a real opportunity to grow that business.

We are at the early stages of that as we go forward in making investments in people and -- making investments in people and structure in Europe and in North America to really try to capture that accessory business as we go forward, both in our own stores and starting to really develop a meaningful wholesale business in North America and Europe as well.

So those are the product categories.

From a marketing point of view, we continue to want to invest behind the retail (inaudible) campaign.

We don't -- that campaign continues to evolve and move forward, but we clearly aren't looking to get off of that at this point.

There is a lot of momentum behind it; consumer continues to really enjoy it, we are able to activate it at retail in a way that brings the brand to life at point-of-sale both in our own stores and in our shop-in-shops around the world.

So I think you will just see more of that marketing campaign just moving forward.

That's great, thanks.

(Operator Instructions).

Robby Ohmes, Bank of America-Merrill Lynch.

I was hoping -- you guys called out in your release actually the Heritage wholesale businesses, particular the gross margin side.

I was hoping you could give us sort of an update on the go-forward look for IZOD, Van Heusen and ARROW.

Maybe give us some thoughts on what your JCPenney initiatives are for those brands right now versus what you are doing in Macy's with IZOD and how you are positioning ARROWs at Kohl's?

Thanks.

Look, that business -- the sportswear businesses for us for those three brands were very strong.

We saw, particularly compared to last year's first quarter which was difficult for the IZOD business.

So the IZOD business now has put together three straight quarters of very strong performance and the second-quarter initial sales trends are very strong as well.

So we really like the way that brand is positioned.

Van Heusen, a very strong launch at Kohl's, the sportswear and the dress shirts and the neckwear continue to sell, they are really making it a focal point for them as they go forward investing behind that brand.

JCPenney's initiative with IZOD continues, the shop-in-shops, IZOD golf is becoming a bigger component at both department -- at all department stores including JCPenney as we go forward.

So the investments we are making from a marketing point behind golf personalities and celebrities and the Heritage that IZOD has in that area we think is really resonating with the consumer and working for us as we go forward.

And I think the last point I would make is with JCPenney in particular -- where we really saw softness in our business last year with Penney was on the main floor, it was in the dress shirt and neckwear businesses.

The old new management team that has come back and refocused has made it a strategic imperative for them to get back into those businesses, dress shirts and neckwear clearly being two businesses that they want to invest in inventory presentation and deliver a value message to their consumer.

And we are working very closely with them to try to position those categories for the third quarter with the back-to-school selling season in those brands and their management team is very much committed to do that.

So I think they are doing all the right things to take advantage of the initiatives that work at JCP like IZOD and some of the other shop initiatives that really worked well.

But at the same time refocusing the initiative back on the main floor where JCPenney historically has owned that main floor classification business and really trying to bring that consumer back in.

So we are working with them very closely to do that and I think that gives us a high degree of confidence about the second half of the year for Heritage wholesale.

Operator, we are going to take one more question and we're going to be at an investor conference and we will be live there as well.

So we will take one more question and end the call, please.

Sir, we actually had no other questions at this time.

I would like to turn the call back to you then.

Okay, thank you very much.

We think everyone for their attendance today and we look forward to speaking with you on our second-quarter conference call in August.

So have a great day and talk to you soon.

Thank you.

Thank you, sir.

That does conclude today's conference again.

Thank you, everyone, that did participate.

Have a good day.