PVH Corp (PVH) 2013 Q2 法說會逐字稿

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

second-quarter 2013 earnings conference call.

This webcast and conference call is being recorded on behalf of PVH, 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 replay of this call.

The information being made available includes forward-looking statements that reflect PVH's view as of September 9th, 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.

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.

Reconciliations to GAAP are included in the second-quarter earnings release, which can be found on the 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, Kyle.

Good morning, everyone.

Joining me on the call this morning is Mike Shaffer, our Chief Financial Officer, and Dana Perlman, our Treasurer and Senior Vice President in charge of Business Development and Investor Relationships.

Ken Duane is also on the call.

Ken runs all of our Heritage businesses, as well as our North American wholesale businesses.

Looking at the business, we were pleased with the second-quarter results.

We beat our second-quarter revenue and earnings guidance.

We saw strong out performance against our projections in both Calvin Klein and the Tommy Hilfiger businesses, as well as in all of our Heritage wholesale businesses.

From a macro point of view, I would describe the environment from a consumer point of view as volatile.

We saw the second quarter get off to a strong start in May and early June, and then the business and the environment softened, particularly in North America and Europe, where we saw traffic trends in June and July that were actually down year-over-year.

Business strengthened again in August, particularly in our North America business, and as we turned into September, we've seen business soften and traffic trends soften in the North American environment.

So overall, we're trying to follow the consumer and see where the trends are taking us.

Focusing in on each business and the performance in the quarter, on the Tommy Hilfiger business, it continued to be strong overall during the quarter.

We posted 11% revenue increase.

Revenues were up about 10% in North America, driven by a 7% retail comp store increase, growth in square footage in North America in our retail business, and strong growth in our wholesale business.

Internationally, revenues were up 11% for the quarter.

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

Our retail comps in Europe posted a 6% increase in the second quarter.

Operating income for our Tommy Hilfiger business grew 3% to $100 million, as 20% earnings growth in North America was partially offset by a 15% earnings decline in our international business.

Continued weak performance in Japan, coupled with gross margin pressure in our European business, caused by higher promotional selling and a weaker US dollar on merchandise purchases, negatively impacting our international results overall.

As we look out to the third quarter, third-quarter sales trends in North America are running on plan, with our retail store comps running up about 3%.

Looking at the third quarter international sales trends, European comps were running ahead of plan, up mid single digits.

We are planning our wholesale fall and holiday sales, up about 8% for the year.

Geographically, we see continued strong growth in central and Northern Europe, with particular strength in Germany, France and Russia, partially offset by weakness in Southern Europe, Spain and Italy in particular.

Looking out to spring 2014, which we begin shipping in January, last fiscal month of our year, we are seeing our spring order projections flat to last year, as strong business trends in Northern Europe are being offset by double-digit declines in Southern Europe, particularly the Italian market.

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

Sales came in ahead of our estimates.

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

Overall, second-quarter operating margins improved in our wholesale Heritage business to over 12%.

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

Third-quarter sales trends are running on plan, and inventory levels are quite clean during the back-to-school season.

Our performance in our Heritage retail businesses for the second quarter was disappointing.

Comps were minus 10%, and were particularly weak in our Bass footwear division.

Third-quarter sales trends at retail have improved, and are now posting a low single-digit negative comp quarter to date so we're seeing some improvement in that business as we move into the back-to-school season.

Moving to our Calvin Klein businesses.

We exceeded our sales and earnings estimates in the second quarter.

We posted strong sales gains and higher than estimated operating income.

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

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

Our order book for the fall holiday season is also running up about 10%, so there is good momentum in this business, as we move into the third and fourth quarter.

Asia, overall comps in our Asia business are up slightly for the quarter.

We saw strong sales in China and Southeast Asia, where comp store sales are up about 5%.

The only difficult market continues to be Korea, where comp sales trends have improved from first quarter, and are now running down about minus 5% for the second quarter.

Third-quarter sales trends in Asia continued to improve, and were running at about plus 2% for the quarter to date, third quarter.

In North America, our businesses continue to perform strongly across all product categories, with the exception of men's and women's jeans.

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

In addition, our North America retail business posted a 6% comp store sales increase, and higher operating margins due to better sell-throughs at higher average unit retails.

The third-quarter trends in these businesses are running on plan.

Quarter-to-date in the third quarter, comps were running on plan at about plus 4% in our retail stores.

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

We have planned these businesses down mid single digits, and are anticipating continued pressure on margins in order to move through goods for the third and fourth quarter of this year.

In the licensing area, ongoing royalty revenues were up about 10% in the quarter, due to the strength in our global handbag and accessory businesses, as well as our women's apparel businesses, which are operated by G-III in North America and CLUB 21 throughout Asia.

Our fragrance royalties for the second quarter were flat as we are planning for significant launches in the second half of the year.

This year, our key marketing initiatives are all second-half weighted.

We have a major women's fragrance launch planned for the third quarter.

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

You're starting to see some the marketing associated with this launch as it goes forward, and we would expect that there would be major -- there is a major marketing campaign around the launch, particularly in the fourth quarter.

Just to update you on our integration plans, which are all on track.

We continue to validate all those plans, and we're seeing all the processes and system conversions to move, and we're on plan there.

Over the last three months, we have successfully converted a number of systems in North America and Europe.

There have been no surprises in this area since the last time we updated you, and we're very comfortable with our integration timetable.

From a people perspective, we have our senior management teams in place across the globe, and have had some key hirings across the globe as well, and are moving forward in a very positive fashion in this area.

Mike will put a little bit more flesh on that.

And I'm going to turn it over to Mike to quantify some of our results.

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(sic-see press release "second quarter") were $1.965 billion, a 47% or $628 million increase over the prior year.

Driving our revenue increase over the prior year was the Warnaco acquisition, which accounted for $507 million, Tommy Hilfiger, which was $77 million, and $43 million in the pre-acquisition Calvin Klein businesses.

Overall, our pre-acquisition Heritage business was flat to the prior year, as our ongoing wholesale business performed well for the first quarter, but was offset by continued disappointing business in Bass retail, and the discontinued Timberland and IZOD women's wholesale business.

Versus our guidance, revenue were up as a result of strong performance in Calvin Klein China, Calvin Klein North America, and Calvin Klein Brazil, coupled with strong performance in our Tommy Hilfiger North America retail businesses.

Our earnings per share for the second quarter was $1.39.

Driving the earnings per share beat was our revenues, which were slightly better than plan.

Our revenues for 2013 are projected at $8.25 billion.

Calvin Klein revenues are planned at approximately $2.75 billion.

Tommy Hilfiger revenues are planned at approximately $3.42 billion, up around 6% to the prior year.

Heritage revenues are planned at $2.08 billion.

Year-over-year comparisons for the Calvin Klein and Heritage Brands revenues are significantly impacted by the Warnaco acquisition.

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

Operating margin for the year is expected to be approximately 11.8%, a 60 basis point reduction to 2012.

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

The current operating margin guidance of 11.8% reflects a reduction of about 20 basis points to previous guidance, as we see continued pressure and volatility, particularly in Southern Europe.

For the year, we are projecting our Calvin Klein operating margins to be about 15%.

Tommy Hilfiger operating margins are planned at about 14%, and Heritage Brand operating margins will be in excess of 8%.

We're planning the full-year tax rate between 25.5% and 26%, and full-year interest expense between $195 million and $200 million.

For the quarter, we're projecting revenues at about $2.2 billion, and earnings per share of $2.20.

When comparing to the prior year, earnings per share for the third quarter impacted negatively by the new seasonality of our business, as a result of the Warnaco acquisition, particularly in the acquired Heritage businesses, coupled with the higher tax rate.

The tax rate for the third quarter is planned at 26.5% compared to 22.2% in the prior year.

About $0.13 of our earnings per share drop versus the prior year is associated with this tax increase.

Also negatively impacting the current year's third quarter is the shift of advertising expense, as compared to the prior year, which is worth approximately $0.10.

Operating margin for the third quarter is expected to be about 13%.

Our debt pay down for the year continues to be projected at $400 million.

Integration efforts are in full swing, and initial conversion has been very successful.

We have converted the Warnaco Calvin Klein North America retail and Calvin Klein jeans operations to the PVH platform.

Our Calvin Klein Europe operations have also successfully migrated to the PVH platform.

We are now focused on North America underwear, as well as planning and allocation systems in Asia.

And with that, we'll open it up for questions.

(Operator Instructions)

We'll take our first question from Bob Drbul with Barclays.

Manny, I guess as you look at the rest of the year, the full year number that you maintained, what was the biggest factors that you looked at that kept you comfortable with the $7 number versus increasing it?

The second question that I have is, can you just elaborate a little bit on the European -- the trends, especially on the wholesale side and the order book a little bit, and the margins, just the promotional side of what's happening in Europe?

Sure, Bob.

I guess we've been pretty consistent.

We've been talking about $7 from the beginning of the fiscal year.

And we're holding onto that, even though, as you know, we've beaten our first and second-quarter initial estimates of the Street.

I think what's causing us to be more cautious about the 2013 fiscal year is just the consumer environment that we see, and the lack of consistency from the consumer from a traffic point of view and spending point of view.

It seems to come in fits and starts.

When you look at our overall sales trends through the first six months of the year, there's still, particularly in the Calvin and Tommy businesses, it's still pretty impressive, putting in mid single digit comp store increases in North America and Europe.

But it still gives us some pause as we go forward, looking at the business, with the plans we've had in place.

So we're really looking at the second half, and right now I guess you'd have to say that we are anticipating that our sales trends will remain positive, but will not be at the same levels that we were able to garner in the first quarter and the second quarter of this fiscal year.

That may hopefully prove to be conservative, but right now it seems to be the right posture to take, based on what we're seeing in the business, when we talk to our retail customers in North America and Europe, our major department stores.

There seems to be a level of cautiousness as they approach the back-to-school season and the holiday selling season.

A couple of good weeks of business will change all that, but right now that's the tone of business, and it's hard to be more aggressive in this environment that we see.

On the European order book, I guess I'd start by just reminding everyone that the last three years, there's been so much volatility in Europe, we've been fortunate enough to grow that Tommy Hilfiger business at over a 10% sales increase on a pretty large business and a very profitable business.

That trend continues through the second quarter.

As we go into the fall season, we're seeing continued momentum in the order book, but as we turn to spring, coming off of what can only be described as a very challenged overall macro European retail environment for the first six months of the fiscal year, I think retailers are being cautious as they buy.

But if you look at our order book, Northern Europe, our order book is up between 5% and 6% and we're really seeing the pressure in the Southern European markets.

Principally the Italian market, where the business is down over 20%, where there's really been a contraction in open to buy dollars and also cautiousness on our part into selling into a number of these small specialty accounts where we have significant credit collection issues there.

And we're just being very cautious as we sell into those accounts, and judicial as we plan that business.

So we're trying to approach the market appropriately.

I've also -- the flip side of that whole comment is when you look at our own retail businesses on the Tommy side, where we're running up high -- mid single digit increases in that business.

That continues to go.

So it gives us -- clearly validates the strength of the brand, it validates continued gains in market share that we're making.

We're dealing with a moment in time with a challenging spring-summer order book in the face of such a challenging 2013 spring order book, with retailers being cautious as they buy.

So I think we're planning it appropriately, and we're dealing with it.

So, hopefully that gives you some color.

Thank you.

We'll take our next question from David Glick from Buckingham Research Group.

Manny, I just wondered if you could update your thoughts on how, if at all, your guidance update today and being a little bit more cautious, how does that make you think about the intermediate to longer-term financial model that you have been talking about?

The high single digit growth in Calvin and Tommy, the overall mid single digit growth in earnings, 15% to 20%.

Clearly, you've got a lot of levers on the Calvin Klein side, particularly Warnaco.

You've got CK bridge, lower interest expense and taxes potentially over time.

But how, if at all, does these recent developments change how you think about the growth prospects for the Company?

When you look at it from a long-term perspective, it doesn't change anything.

The opportunities which we've been speaking about for the last nine months on the Calvin side and the Tommy side, we're just more excited about.

We don't think that any of the trends we're seeing in the businesses really have any impact on what's going on there.

More intermediate, meaning I know how the investment community's thinking about, starting to think about 2014, clearly the order book for such an important business in Europe being flat will put some pressure on some of the earnings growth that we see.

But as you said, we have plenty of levers.

We expect to have a benefit on the interest expense line.

We expect to see margin improvement in the Calvin Klein businesses as we go forward.

We think there's margin opportunities in Tommy business.

So I guess in the intermediate period, it will put some pressure on that 15% to 20% growth range, and maybe puts us more on the bottom end of that as we go forward, as we start to think about it.

But it's really too early to start to give any specific guidance about 2014,.

But from a pure growth trajectory point of view, opportunities for both brands and what we see, nothing that we're experiencing in this short window and dealing with the consumer, as they go through the volatility in the economic markets, really impact our thinking about what the growth opportunities for the two brands are.

Thanks.

Just a quick follow-up.

CK bridge represents a major white space opportunity for you in Europe, and could you update us on where your thinking is now in terms of the launch and roll-out of that brand?

Sure.

I think in Europe -- let me take a step back.

As I think everyone's aware, it's already a very successful business in Asia, throughout Asia, CLUB 21, in conjunction with us, runs that business.

And that continues to be -- to grow at a double-digit rate, somewhere between 12% and 15%.

So we're very happy how they manage the business and growing.

In Europe, the plan is to launch men's for fall 2014 with our major wholesaler accounts.

Also, to begin to open some of our own retail stores, Calvin Klein, where we would have women's accessories and women's apparel as well.

And then looking out probably a year or so, launching women's apparel in the 2015 time frame, probably fall is the thought process right now but to continue to really focus on that.

We see it as a big opportunity.

We believe we understand the market, and have the infrastructure with the Tommy Hilfiger experience, and management team that's in place to really take advantage of that.

But it's critical for us first and foremost for us to really get our arms around the jeans business, have that repositioned, get some traction in that business, improve the distribution in that business in Europe, and take a business that's actually losing money and start to bring it to a breakeven to a small profit in 2014.

And then move it forward, combined with the platinum launch, to really start to create a significant sportswear apparel offering for the Calvin Klein brand in Europe, that just doesn't exist today.

Great.

Thank you very much.

Good luck.

We'll take our next question from Christian Buss with Credit Suisse.

I was wondering if you could talk about some of the progress with the key hires that you've been looking to make.

Sure.

Clearly throughout Asia, we've made some significant progress.

We've hired some key positions in the merchandising, design, and the planning side of the business.

In the retail side of the business as well, strong management team in place in country there that existed with the Warnaco Group and very close to announcing the hiring of a new CEO for Calvin Klein Asia.

Similar fashion in Europe, that business has all come under the direction of the Tommy Hilfiger management team on the ground.

Systems have been converted, management's been put in place.

The country managers have now been all put in place for the Calvin Klein business, as well as the Tommy businesses.

As we go forward, and we should be very close in the next 1.5 months to making an announcement about a new CEO for Calvin Klein Europe as well, both of those are down the road and will be in place by the fourth quarter of 2013.

So good progress there as we move forward.

In North America, the business is really -- we've taken the business forward.

We've moved the jeans business under our Calvin Klein sportswear businesses, which we have been very successful with here in North America, under Alex Cannon.

We've also moved the underwear businesses under Cheryl Dapolito, who's taken over that business for us, and brought it forward.

On the supply side, both in jeans and underwear, we've made good progress.

We've got some strong people, and the global supply officer that was brought in place to really move that business forward as well.

So I think we are on track to where we thought we would be from a people perspective in moving forward.

Sill some work to do there, but I think we'll be well-positioned as we go into 2014 from a people perspective.

Could we talk a little bit about the systems?

Can you give me a little bit of a sense of the time line for the integration of those Warnaco systems onto the PVH platform over the next 12 months?

And then when do you expect to be fully complete with that systems integration?

Let me start with the last piece first.

As we look to the full integration, it won't be until 2015.

But the bulk of the systems integrations in North America will be completed in 2013, and in the first half of 2014.

Asia and Latin America will then follow.

Europe, as I've said before, has already moved on to the PVH platform, so that is the time line as it stands today.

That's the same time line that we started the fiscal year.

So everything is done on track.

That's great to hear.

Thank you and good luck.

We'll take our next question from Erinn Murphy with Piper Jaffray.

I wanted to focus a little bit on trends in Asia, maybe first with Calvin Klein in both China and Korea.

Seems that you have still been very strong in China, despite some of the denim peers struggling, a lot of excess inventory there.

Could you just speak a little bit more to that landscape?

In Korea, still a little volatile, maybe help us appreciate the comparisons you're up against in the back half of the year?

And then for Japan as it relates to Tommy Hilfiger, could you just help us understand, if you've repositioned the brand there, what you've seen year-to-date.

It sounds like it's still a little bit soft in promotional.

How should we think about some of the levers you have in the back half of this year?

Okay.

Starting with the Calvin Klein businesses.

Our China business has been strong all year.

As soon as we took over the business and got involved, and even before we took over the business, we made a decision about cleaning out inventories quickly, so there was a significant inventory glut.

There was about six months too much inventory on hand.

We moved that inventory.

We destroyed some of that inventory.

We moved some of that inventory to other markets, but we took decisive action to try to get that behind us, and I think probably moved quicker than most of the other markets in China, other competitors in China to get fresh goods in place, particularly by the start of the second quarter.

So our business there has been good, continues to be good, and I think we're not suffering as much from some of those inventory situations, because we've moved so quickly when we got involved.

When you think about Korea, Korea has been a tough market, both macro and micro for us, with our own situation and issues.

I think most of our inventory flow issues are behind us, particularly as we get into the third quarter.

You're absolutely right, we start to cycle some double-digit negative comps from the prior year, so I think the comparisons do become easier, and we've seen business improve from trends that were running first half of the year double-digit negative comps to low single-digit comps in the third quarter so far to date.

So seeing some improvement there as we go forward.

So I think in Asia, I think we have the business planned appropriately.

We have room in the business, if we stay on the trends that we've seen outperform our plans financially as we go forward, the driver being for the Calvin Klein business, really the China business as we go forward and the stability that we're starting to see in Korea, quicker than we might have anticipated.

The Tommy Hilfiger Japan business has been a challenge for us since the acquisition.

It's the only piece of the Tommy Hilfiger business that really hasn't come together well for us.

We made the decision after about owning it for a year to reposition the brand in Asia, and really take it up to mirror the way it's positioned throughout the European and Asian markets overall.

And obviously when we've done that, we moved very quickly.

The consumer is still catching up with that.

It is the right thing from a brand positioning point of view but it is putting pressure on the top line and the bottom line.

We believe we are under the numbers now from a point of view, we're not happy where the numbers are, but we're clearly in the single-digit operating margin range for a business that's about a $250 million business for us overall.

So we think there's opportunities as we go into 2014 to start to see some improvement in that business.

It's a business that should operate, when it's hitting at the right cylinders, in the 10% to 11% operating margin.

So there's clearly opportunity there.

I don't believe it's going to come to a short-term.

I think it's more of a long-term 2014, 2015 issue for us to get that business back on track as we go forward.

Thank you for that.

I guess just a quick clarification on the Tommy Hilfiger international margins then, a little bit lighter in the second quarter.

Is that the promotional-driven nature of what happened in some of the key regions there for Tommy?

And then, just with inventory being in good shape, should we expect the margin profile of the international business for Tommy to improve in the second half?

Or just maybe help us think about the puts and takes there.

Thank you.

I think as you start to look at that business, the expectation is those operating margins will level off and it should be flat to up slightly for the second half of the year.

I think we were -- I think we were aggressive about marking inventory down, both from a financial perspective in the business, and from an in-store point of view.

So I think a lot of that is behind us as we go forward.

Some of the US dollar purchasing issues alleviate as we get into the third and particularly into the fourth quarter, so some of those comparisons year over year with the weakness of the dollar, from a hedging point of view on inventory purchases, which has been impacting us for the first half and into the third quarter of this year, will be behind us.

So I think you'll see those margins in the third quarter flatten out, and then we should start to see improvement in the fourth quarter, and that's really just with the sales trends that we're seeing in the business today.

It doesn't call for any major Herculean changes in the business.

We feel very confident about that margin expansion in the second half of the year, and hopefully can see some sales upside as that European environment starts to stabilize.

Great.

Thank you, and best of luck.

We'll take our next question from Omar Saad with the ISI Group.

Manny, thanks for all the color, especially in Europe.

It sounds like on the Calvin Klein Europe piece, you've got a lot of the management pieces in place, systems pieces in place.

It's such a big profit dollar opportunity, Calvin Klein Europe, from where it stands currently, as you took the business over.

Is it time now to start thinking about the cadence of when some of the big chunks of those profit improvements are going to flow through?

Is it -- or is the macro headwinds going to overweigh that?

Thanks.

I think, look, it's a very fair question.

We have a Calvin Klein business that does $500 million between jeans and underwear in Europe.

It's a business that all-in is -- if you put it all together, is operating at low single digit operating margins, 3%.

Clearly, that's a business that should be at least, let's just use 10% as a goal.

I know everyone's going to tell me Tommy's at 14%.

I think 10% at this moment in time for the next three years would be a great goal for us to improve, from 3% to 10%.

Clearly there's that opportunity ahead of us.

How quickly it comes, you have to remember we're not dealing with white space here.

We are changing a lot of the distribution.

We're cleaning up the distribution.

There is some profitable businesses in the secondary channel that we are making the decisions to get out of.

As we're seeing growth, particularly in the spring book for Calvin Klein, if you look at it from a regular price business, the business is up 10% to 15% in jeans, at the same time that we are bringing the off-price business down, so overall, it's up slightly, we're planning for spring 2014 but on a much healthier distribution platform, better sales.

Also to remind everyone, just by the nature of the jeans business in Europe for Calvin, the way it's been established, 75% to 80% of that business is done in Southern Europe.

So those markets, although we're seeing growth in those markets for the Calvin brand, it's still an environment that's very much challenged, and if that starts to stabilize and improve, I think we could start to see an acceleration there.

We're making significant breakthroughs in Northern Europe on a very small base, but from a percentage point, seeing very, very big percentage increase growth with the opportunity to really grow that business further.

So there's real opportunities there, and I think we'll see improvement in operating margins in 2014.

I'm not, at this moment, ready to start putting a stake in the ground, what it would be, but I think you clearly have to think about this improvement from 3% operating margins to getting to 10% operating margin, as a three to four year path to get there.

It's not going to happen overnight.

It's going to take time to reposition the brand, to get the profitability to where we think it needs to be, and to move the business forward as we go.

And making the right investments to really take advantage of what we think is at least $1 billion opportunity as we go forward, and today we're at $450 million to $500 million.

So a big opportunity over the next four years with the brand and a very big margin expansion.

The cadence of which I don't think we're ready to be very specific about, but we're trying to point out the opportunity.

It will improve, the magnitude of that improvement, I think as we get into the fourth quarter and first quarter of next year, and ready to give guidance, we'll be more specific about.

Got you.

And then a quick question on Tommy Europe, Manny.

Is it fair to say you're seeing a dichotomy in the business, the Tommy wholesale, I'm not talking about Northern versus Southern, I'm talking about the wholesale through the department store channels in Europe versus the Tommy-owned stores which seem to be comping pretty well.

Am I interpreting that right?

I know the focus is on spring 2014.

I understand that.

I think you have to think about the business model in Europe, which is more like the North American model used to be 25 years ago.

We had a pretty healthy spring order book, up 3% to 4%, followed by a strong order book for fall, planning up 9% to 10% as it came through.

So in that -- as a backdrop to that, the retail comps we're seeing in the business mirror that, what's going on.

The issue really is from a macro point of view, the retail environment in Europe was very much challenged in spring 2013, and every retailer is buying the spring 2014 order plan very cautiously, and everyone is planning their open to buy dollars down, and what we are seeing in Northern Europe, where our business might have been up 10% to 11% for fall, we're seeing that up 5% to 6%.

So still pretty healthy growth.

Unfortunately, we're really being impacted in Southern Europe, where we're seeing double-digit declines closer to 15% overall, with the Italian market down over 20%.

Where we have seen open to buy dollars cut and also we've eliminated a number of specialty store accounts where we're really concerned about being paid, as we go forward, given the economic environment there.

So I think we're really dealing with a moment in time on that spring order book and we have to get through it.

So I think it's, as you look at it and get into it, I don't think it's really a disconnect.

It's just understanding how the business models work, and where we're going.

So what it tells us is the brand continues to be very strong.

We continue to garner market share in the wholesale channel but also in our own retail channel, given the strength of the performance we see.

We're recognizing this is an issue we have to deal with, spring, summer order book, that we have to deal with.

But we really feel it's a moment in time and a transition as we re-establish ourselves, and I would expect that our fall order book would be up in the mid single digit range as we go forward, but that's to be seen as we go forward.

Thanks, Manny.

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

Wanted to jump back across the pond to Tommy Hilfiger North America.

I think square footage growth's been pretty impressive this year.

How many more outlet doors can you open in North America, and what's the full price square footage growth opportunity over the next few years?

Well, let me take the second part first.

I clearly -- we operate in North America all-in, from a specialty store, regular price business, probably 20 stores overall.

There's clearly a huge opportunity, if that materializes as successful business strategy, and that's what we're testing.

I think the specialty store opportunity -- the specialty store test that we're doing is two-fold.

One is we think regular retail is very appropriate for the brand, positioning of the brand, having a chain of overall 30 to 35 stores throughout North America from where we are today at about 20 would be great.

It positions the brand.

It communicates with the consumer, it will be part of the overall marketing of the brand to the consumer, and really allows us to showcase the brand in appropriate retail formats.

The separate question then is, well, doing that, can you actually make money, and does it make sense?

And that's what we're testing.

And our results have been mixed.

We have some good stores that are making a nice profitability for us in that channel.

And we have other stores that are breakeven to a small loss for us as we go forward, and we're in the very early stages of development, and you would expect that to happen.

So the specialty store opportunity is huge, and I guess if you said what could be the magnitude, you theoretically to have 100 stores to 125 stores thought North America, if you could do it profitably and we wouldn't get too far ahead of ourselves until we could prove that to ourselves.

Next year I think we're talking about opening two stores.

So clearly this is a slow test, understanding and communicating with our consumer, and also getting the benefits from a brand positioning point of view for a relatively small dollar investment to balance off our positioning in North America, be it our Macy's full-price strategy, some of our outlet strategy as well.

Where we had tremendous square footage growth, and I don't think it's going to be as high in the future has been in the outlet environment.

Not only new stores, but also the ability to expand square footage in major double-A markets like Harriman, New York, Orlando, Florida, and Las Vegas, Nevada.

Some of those still exist and I think we'll see it.

When we think about square footage growth I think we're talking about 3% to 4% square footage growth for Tommy going forward, coupled with conservatively 2% to 3% comp store growth, I think that would translate into business that would grow 5% to 6% to 7%.

And we're always looking for opportunities to be opportunistic about growing that square footage, since it's probably our most profitable business in North America.

Great.

That's really helpful.

I guess one final question.

Is timing of the realization of the $100 million in cost synergies with Warnaco, has that changed at all in terms of your thinking and when that will flow through?

Thanks.

No, we're still on track.

We're talking about $25 million for this year and we're still on track for the $100 million as we move forward.

Okay.

Great.

Thanks.

We'll take our next question from Kate McShane with Citi Research.

Manny, with regard to your comments about pulling back some sales from Southern Europe, I understand Italy is weak.

Is this the first time that you are pulling back product or has this been ongoing?

Well, I guess, look, we're always looking at crediting and the situation.

I think it's been -- it's been ongoing, but our sales declines in Italy have been more in the 8% to 10% range, as opposed to what we're seeing for spring 2014, about a 20% decline.

So that is one market when we talk about Europe in general, saying we're seeing some stability, and we're not seeing any stability in the Italian market at all, and that continues to be a very difficult market overall.

Okay.

Is there any opportunity then, because of this strategy, as you look into spring 2014, to reduce some of the SG&A spend, or is that -- what is the strategy around SG&A dollar spend?

Well, that's a great question.

Given the size -- when we looked at the Calvin and Tommy business in Italy combined, and it was one market where Tommy had a major position, actually larger overall than the Tommy business, we really felt we needed two organizations, as we go forward.

We're in the midst of re-looking at that overall, trying to understand where there might be some more synergies as we rationalize the size of both businesses as we go forward.

So that's in-process dialogue and we're looking at it as we go forward.

So clearly, it's one of those areas that, as we are looking at the trends in the business, that we're looking hard at to see if there's some SG&A expense leverage that can be gained there.

Okay.

That's helpful.

Thanks.

Then my last question is a bigger strategic question, just around Calvin Klein underwear.

As you take a look at the positioning of that brand, particularly in the US, there's been some consolidation with Hanes taking over Maidenform.

I wonder how that maybe changes the strategic outlook for Calvin Klein underwear.

It has minimal effect on the Calvin business.

I mean, Hanes is the major player in the market, particularly post this transaction.

And I think it's -- but we're really in the designer underwear business.

Our price points are significantly higher.

Their distribution is dramatically wider, selling a number of their brands through Walmart, all the way up -- some through Bloomingdale's, where Calvin is really a department store business, a North America specialty store business, price-positioned, I think three times the price positioning of Hanes on the men's side.

And on the women's side as well, we're really in a different -- we really feel like we're in a completely different market, from that perspective.

So I don't think it really impacts Calvin.

It will have some impact on our Warner's business for sure.

I think in some ways it creates opportunities, as a player becomes bigger and bigger, retailers are always looking for opportunities.

I think begin our portfolio -- when you think about us, I know everyone thinks of the Calvin Klein's underwear business, but on the men's side, we have a Michael Kors business, we have an IZOD business, we have a Van Heusen business.

And a Tommy Hilfiger men's underwear business that is significant, that gives us a good position in the market overall.

So I think it -- we are well positioned in the overall women's intimates business, and the men's business to really continue to grow those businesses.

Okay.

Thanks, Manny.

We'll take our next question from Evren Kopelman with Wells Fargo.

Manny, I wanted to get your maybe thoughts on the volatility in the market in North America.

You talked about, you've seen recently, any thoughts, I know some have attributed the weakness to wallet share shifts given the strength in big ticket items like cars.

What do you think about that?

Do you think there's any weather impact?

If you could share thoughts there, that would be great.

Those all are very logical ideas, concepts, whatever.

I guess I'll leave that to you.

That's your job, to figure out why.

I have to deal with what we're facing.

I do think that probably a number of those things are all true.

Everything I read -- I watch the same economic reports that you do, seeing autos up, I see home purchases and related goods.

And when I look at retail performance, the one area that continues to be a standout is anything to do with either home building or home furnishing.

So I'm sure there is something to do with that.

If that's all true, then I think as we move through back -to-school and really turn into the holiday season, I believe the consumer really -- apparel becomes front-of-mind focused, so it gives us a lot of optimism about the fourth quarter as we go forward.

That, coupled with having to anniversary last year's Sandy, which really impacted November and early December selling, which is the two very significant months for us.

I think the fourth quarter has tremendous amount of sales upside if all that holds together.

Have you seen the department stores change any planning?

Any cancellations, things like that for the holiday season, given the back-to-school trends?

We've not seen any cancellations in our business.

We have I guess -- I have seen in general the promotional environment intensify.

I don't know if I would describe it as a department store issue, as much as specialty store issue.

And I guess, as would you imagine, as inventories built up in July, what I've heard in the market, although we haven't really experienced it in our businesses, some shipments have been delayed for some periods of time, bringing goods in, as they work through June and July inventory.

I think relatively speaking, I think the market is -- the inventory position doesn't trouble me at all in the market.

The promotional environment does concern me.

It seems like specialty has gotten very promotional.

When I walk the mall and I see it, that does put pressure into the channel.

We'll see how that plays itself out, as we go forward.

I think it's become, particularly in that area, I think the teen market has become very promotional, which does put some pressure on our jeans business.

Not so much in our more adult apparel, some of our IZOD, our Calvin, Tommy sportswear business, haven't really seen it there, but seeing more pressure in the jeans area.

Okay.

That's very helpful.

Lastly, if I could ask about Tommy Hilfiger in South America,.

Can you give us a little bit of color of where that business is, if some of the strength Calvin Klein has in Brazil, if there's been any work done yet, working off of some of that strength?

And what's assumed for Tommy in South America in that three year, 8% to 10% growth goal you have for the overall brand?

South America for Tommy is about a $250 million business.

It is a business that is totally licensed.

We have a joint venture relationship with Inbrands where we own about 40% of the business, with Inbrands in Brazil.

For that market, which we think is a huge growth opportunity for Tommy, the Brazilian market is only about $25 million for Tommy compared to Calvin, which is well over $200 million.

So clearly, we think it's a big opportunity.

Brazil is a very tricky market from a supply point of view, bringing goods in, from a real estate point of view, developing it.

There is no true department store in Brazil.

It is a specialty store and a retail strategy.

Our strategy with Tommy has been to partner there and our strategy for Calvin, the strategy for Calvin had been exactly the same, except they got a much earlier start.

Started as a distribution, then a joint venture, where Warnaco owned a percentage of the business.

They took a larger percentage of the business four or five years ago, and then bought the entire business about 18 months ago.

So I think we see ourselves on the same path with the Tommy Hilfiger business in Brazil as we go forward.

But again, I don't envision any a transaction for three to four years where we might bring that business in-house, because of the relationship we have with Inbrands, what they bring to the table and the growth that really can come from the business.

The rest of the South American market, it's about a $200 million business.

When you take it all in, the South America, Latin, it's been growing at a double-digit rate overall.

This year, some of the markets in South America have been more challenged, Venezuela in particular, and Argentina as well, where Tommy has a major presence there.

So this year it's been a little softer there, but I think as we look out, we expect that market to grow in the 10%-plus range overall.

So a developing market for Tommy, with huge opportunity, as we go forward.

I would describe it as more of a long-term opportunity.

Thank you.

We'll take our next question from Eric Beder with Brean Capital.

Congratulations.

Could you talk a little bit about the Heritage businesses, what is happening with Bass?

And how is your business doing at JCPenney, and how do you see that changing?

Sure.

I guess there's really two stories.

We've got -- we have a $600 million retail business and a $2 billion -- $1.5 billion to $2 billion wholesale business, which is performing -- the wholesale business is performing very well through the first six months of the year, operating margins above 12%, running ahead of plan.

Strength in our dress shirt and furnishings business, strong performance in our sportswear businesses.

Speedo has been a delightful surprise for us as well, as well as the Warner's Core intimates business overall.

We think the business overall when you put seasonality in, third quarter is just seasonally a weak quarter for some of the businesses.

We're going to be in excess of an 11.5% operating margin overall for Heritage wholesale, so we're very happy with that business.

The weak side of the business has been our Heritage retail business, particularly the Bass footwear division, which is about 50% of that business.

As I said, comps were minus 10%.

We've seen an improvement in the overall comp store trend.

We were down about low single digits through the quarter to date for Heritage, and are looking for that trend to more or less continue into the third and fourth quarter, as we go forward.

So that is the area where we need to improve.

Operating margins in this business are low single digit.

We're not happy with them.

We recognize something needs to be done.

We are looking at initiatives in that areas as well, so it's an area that needs to really be focused on as we go forward.

And in terms of JCPenney?

Sorry.

I apologize.

The JCPenney business, we have -- we're happy with the business.

It's on plan.

The sportswear business in particular running way ahead, as you would expect, as IZOD was a second half launch last year.

Our dress business is more or less slightly off of plan, season to date, year-to-date, but we're starting to see some good results there, as inventories start to build back into the pipeline.

I think that business will just continue to improve as we move through the third quarter into the fourth quarter, and as they fill that pipeline, particularly for the holiday season as we set up.

So we're optimistic about how that works.

We've seen big improvement in our neckwear business which we were able to react to the inventory demands much quicker, given the much shorter lead times in neckwear.

That business is actually comping positive in that business.

So overall, we're happy with all business at Penney's.

I know they're looking for a significant turnaround in the third quarter.

I think as the inventory levels get into position, as their price positioning gets -- and re-ticketing is fully in place, and their message to the consumer comes across, I think they're starting to see some improvement in the business.

I'll let them speak about their own business, but I could just say, from our point of view we think they're making a lot of the right moves to drive that customer back to the store, to really drive the inventories forward, which will really allow them to promote and deliver a value message back to their consumer, and I think is the start of getting their business to start comping positive in the second half of the year.

Great.

Thank you.

We'll take our next question from Howard Tubin with RBC Capital Markets.

Maybe just a quick question on, just an update on your marketing plans in North America for the upcoming fall season, for both brands, Tommy and Calvin Klein?

I think our plans are pretty much consistent with what they've been the last few years.

We're not looking for a dramatic increase in spend overall for the year, but if you look at our marketing spend, it's being more intensified in the third quarter this year, first half down slightly, fourth quarter down slightly, when you take out the Warnaco noise of that fourth quarter.

But third quarter up pretty significantly.

And again, I think it coincides with some of the major launches we have going on, and some of the launches we had going on last year, where fragrance was more first-half weighted last year.

It's more second-half weighted this year, and last year we had a major underwear spend in the fourth quarter around the Super Bowl which we're not anticipating to repeat this year.

So when you put all that in on the Calvin side, I think that there hasn't been a dramatic change in the overall spend, but some of the quarters have really moved.

On the Tommy side, it's business as usual, continuation of the focus on the brand.

And uplifting the brand, both from a presentation point of view, and marketing spend there.

And also from a print media spend as we go forward.

You won't see television this year.

I think the real focus will be on outdoor and print and social media, both here in Europe and in Asia in particular, with increased spend in China in particular, as the Tommy brand continues to grow there very strongly.

That's great.

Thanks.

We'll take our next question from Dave Weiner with Deutsche Bank.

So two quick questions, if I could.

One in the terms of your comp expectations for the quarter, could you talk a little about how much of that, either what you're seeing or what you expect for the quarter is being -- you would attribute to AUR increases versus traffic, and if you can maybe differentiate a little between CK and Tommy in North America and Europe, that would be helpful.

And then as a second question, following on an earlier one from someone who asked about maybe consumers taking a breather here on apparel in favor of some other segments, I think one of the call-outs from specialty, some specialty guys, and even some department stores, is that there's been a lack or a void of more compelling fashion products for consumers.

You had skinny.

You had color.

You had dresses over the last 2, 2.5 years.

Do you have any thoughts on whether you're seeing that at all?

Or any comments there would be helpful.

Thanks.

Okay.

On the first part, I guess through the first six months of the year from an AUR point of view, in North America, the Calvin -- in Calvin Klein the AURs were up across the board, pretty healthily overall.

The Tommy Hilfiger AURs were up slightly, not as much as the Calvin AURs, and when you look at the mix of the business coming from there, it was a combination of AUR in North America and increased traffic overall as we went our conversion.

Traffic was actually down slightly, and we had an increase in AUR in conversion in Calvin and Tommy North America.

In Europe, AURs are down.

It's the pressure in the market.

Some of the mix of the business, as you could imagine, in this kind of environment, our outlet stores are really posting very strong comp store increases where our full price business is up 1%, the outlet business is up even higher.

So that has really shown that AURs overall are down slightly in Europe as well, and also is part of the gross margin discussion I had a little bit before this.

As far as trends that are going on, look, I think there was some -- it's like anything else.

There's always some positive trend going on.

Tommy was really able to take advantage of some of the real color stories that went on in the bottoms business and whatever.

I think offsetting that is the denim business has solidified from where it was significantly weaker, in the macro environment in North America.

Denim is not comping double-digit negatives anymore.

In fact, it's probably flat now to slightly up.

That's not as much a drain, and that's a usually a margin builder for you, as you go forward.

Although there's fashion in the business, it's also a much more predictable business, especially when you're on sales trends.

I think from that point of view especially on the women's side, I don't think that there's anything exciting going on directionally from an apparel point of view, where dresses were huge a couple -- a few seasons ago, and that helped drive the business in other categories.

I think there's nothing that's dramatically different that's really changing anything there.

So I don't think that there is excitement in the overall apparel area, and that's one of the problems that we're dealing with right now.

Great.

Thanks for the color.

Okay.

We'll take one more question, operator, and then have to call the call as we're approaching 9.45.

We'll take the next question from Robbie Ohmes with Bank of America-Merrill Lynch.

I know you've got to go, so just a quick question, a follow-up on Dave's question.

Can you take that AUR conversation in the IMU versus promo outlook into what your backlogs for the back half of this year, and spring of next year.

I know AURs have generally been strong for the last couple years.

How does that look going forward, in North America and Europe?

I think that is -- as you go into every season, I think that's always the challenge, is what the sell-through is going to be, what kind of AUR expansion, can you sell more goods at first and second mark downs than third mark downs?

What I will say is there is no ticket -- any significant ticket price increases going on.

The cost environment is such that we're not seeing any real cost pressures coming from a sourcing point of view as we look into spring 2014.

So there's the pressure that existed, say two years ago and has continued from some point of view to move retail in order to drive AURs, that's behind us.

That's not there.

What you're always looking to do is to drive your AUR up by selling the mix of business that you sell, managing your inventory flow-throughs, and as you go through, so that's always a big question.

As we look out, we're not anticipating dramatic AUR expansion in Calvin and Tommy, we're looking for 2% to 3% AUR expansion.

And in our Heritage businesses, more like 1% to 2%.

So the growth is going to be really unit-driven as opposed to AUR-driven as we go forward.

That seems to be the way most retailers are planning their businesses as they go forward.

Got it.

Thanks very much.

You're very welcome.

Okay.

I'd like to thank everybody for joining us today.

We look forward to speaking to you in December on our third-quarter call, where we'll update you on our progress on the integration of Warnaco, and our business overall.

Everyone, have a good day, and thank you very much.

This does conclude today's conference call.

Thank you all for your participation.