PVH Corp (PVH) 2014 Q2 法說會逐字稿

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

second-quarter 2014 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 written permission.

Your participation in the question-and-answer session constitutes your consent to having anything you say appear on transcript or replay of this call.

The information being made available includes forward-looking statements that reflect PVH's view as of September 3, 2014 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 call.

These risks and uncertainties include PVH'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 referenced earnings release with 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, Kim.

Good morning, everyone.

Joining me on the call is Mike Shaffer, our Chief Financial Officer; Dana Perlman, our Treasurer and Senior Vice President of Investor Relations; and Ken Duane, the CEO of our Heritage businesses and our North America Wholesale businesses.

Business trends in the second quarter came in pretty much as we expected.

We had anticipated a highly promotional retail environment particularly in North America.

Given that macro retail environment we are pleased with our second-quarter results, which exceeded our earnings guidance.

This outperformance was driven by the results of our Tommy Hilfiger business, which posted an 18% increase in earnings for the quarter.

The other positive news coming out of the quarter is that inventories, our inventories as well as overall industry-wide inventories at retail are clean and back in balance as we enter September and the all-important back-to-school selling season.

Let me highlight some of the key trends that we have seen in each of our business units for the second quarter and early part of the third quarter.

As I indicated, our Tommy Hilfiger business had a very strong second quarter.

Revenues increased 9% driven by strong wholesale growth, retail square footage expansion and a comp store sales growth increase in North America of about 2% and 3% in Europe.

As we begin the third quarter sales trends have improved in August with comps sales in Europe up and North America up mid single digits.

At wholesale in Europe we continue to plan fall holiday sales up about 5% based on our order book -- our current order book.

Our sales of the spring selling season is well underway and based on our current order book we are projecting continued momentum with wholesale growth of about 5% for the spring season.

Moving to Calvin Klein, revenues for our Calvin Klein business increased 1% in the quarter which was slightly ahead of our forecast.

Second-quarter sales continued to be negatively impacted by planned declines in the wholesale jeans business as we continue to restructure the sales distribution mix by reducing off-price sales.

Our Calvin Klein underwear business continued its strong performance posting mid-single-digit wholesale sales growth in the quarter.

At retail our North American business posted a 2% comp store increase while comp store sales in our international business declined 4% driven by the ongoing transition of our European business and softness in Asia.

Calvin Klein sales trends in the third quarter have also improved with comp store sales up mid single digits in North America and up low single digits internationally.

Early reaction to our new product deliveries have been positive but it is still early.

Men's and women's underwear are posting double-digit increases in average unit retails and we are exceeding our retail sales plan with our major department store customers.

In the jeans area new product is just beginning to hit the retailers floor.

We have significantly upgraded our denim offering.

Commensurate with the Calvin Klein brand position we have increased our US opening price point jeans to $69.50 in men's and women's from its previous position of $49.50.

Overall we expect to roll out the bulk of our new Calvin Klein jeans shops in North America and Europe in September and October before the all-important holiday selling season.

We will open about 150 shops in Calvin Klein jeans men's and over 50 shops in Calvin Klein women's across North America.

And we will open about 80 new shops across Europe in the third quarter.

We have opened about 20 men's jeans shops in August and we have seen a significant uplift in initial sales post-installation with healthy sellthroughs.

As we have mentioned before, we believe our Calvin Klein jeans men's product is further ahead relative to our women's product but we believe we are seeing nice improvements with the new fall product deliveries.

Europe and Asia have also seen an improvement at retail and wholesale and we believe we are seeing some early signs of positive consumer reception over the past few weeks.

New products are just beginning to hit the floor but once again I remind everyone that it is still early in the selling process.

Moving to our Heritage business, our Heritage business sales were relatively flat but experienced significant margin pressure as our North American moderate brands were most of really impacted by the promotional retail environment in the second quarter.

As we begin the third quarter our Heritage wholesale businesses are well-positioned to deliver strong growth driven by our Van Heusen and IZOD businesses, which are planned for growth with our key retail partners.

In particular our IZOD brand is launching at Kohl's.

This launch is being supported by a major marketing campaign which will begin in early September and very strong retail presentations at all major Kohl's doors.

We are very excited about this new business and believe it will help drive our second-half Heritage business turnaround.

From an integration point of view from the Warnaco acquisition, we are on track.

All our systems conversions have taken place as planned and we will be substantially complete by the beginning of the spring 2015 season.

Overall we are cautiously optimistic about the second half of 2014.

We believe we are well-positioned to achieve our targeted earnings growth, which is expected to be in excess of 15% in the second half of the year.

This confidence is based on four key factors: inventories at retail are in good shape and although we believe it will be a normally promotional back-to-school and holiday season, we do not foresee the clearance markdowns that were required in the second quarter of this year or the fourth quarter of last year to bring season-ending inventories back into line.

By the end of the third quarter we will have anniversaried the entire investment spending on the Calvin Klein jeans and underwear business and we will not be up against this headwind in the fourth quarter.

We believe our new fall and holiday product initiatives for jeans and underwear along with our new retail shop presentations will continue to improve sales trends throughout the fourth quarter.

And finally August sales trends of both Calvin Klein and the Tommy Hilfiger business have begun to accelerate and we are currently ahead of our sales plan.

With that I would like to turn it over to Mike who will quantify some of the second-quarter results.

Thanks, Manny.

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

Revenues for the second quarter were $1.98 billion, a 4% increase over the prior year when excluding the Bass business we sold to G-III last year.

Driving our revenue increase over the prior year was a 9% increase in our Tommy Hilfiger revenues.

Calvin Klein revenues were up 1% and our Heritage revenues were flat excluding Bass.

Our earnings-per-share for the second quarter was $1.51, a $0.06 beat to the top end of our previous guidance of $1.40 to $1.45.

The beat was primarily driven by overall better-than-expected gross margins and expense savings.

By business unit we were disappointed with the performance of our North American Heritage business which was negatively impacted by heavy promotional environment and fell short on revenues and gross margins for the quarter but was more than offset by strong performance at Tommy Hilfiger.

Our Calvin Klein earnings were on plan for the quarter.

For the third quarter we are projecting earnings per share of $2.45 to $2.50, or an increase of 7% to 9% over the prior year.

Revenues will be about $2.25 billion or an increase of 3% over the prior year excluding Bass.

Our earnings per share for 2014 continue to be planned at $7.30 to $7.40 as the second-quarter EPS beat is being offset primarily by a takedown in revenue and earnings in the second half of the year due to a decrease in FX largely driven by a weaker euro.

In addition, our 2014 earnings continue to be negatively impacted by the incremental spending in the acquired Calvin Klein businesses.

We have not reduced these investment plans from our initial budgets and will continue to make all necessary investments to continue to grow these businesses for the future.

Our second-half EPS estimate currently reflects growth in excess of 15% over the prior year which is heavily weighted to the fourth quarter.

Our revenues for 2014 are projected at about $8.4 billion, or a 4% increase over the prior year excluding Bass.

Tommy Hilfiger and Calvin Klein are planned to have revenue increases of 7% and 3% respectively.

Our Heritage business revenues are planned to increase 2% excluding Bass.

Our downward revision to revenue guidance reflects negative impact of FX due to a weaker euro as well as the impact of weaker-than-planned sales in our Heritage retail and dress shirt divisions.

The lower estimate for dress shirt sales is due to softness in the basic replenishment area.

Our full-year operating margins continue to be planned down 60 basis points versus the prior year.

The 60 basis point decrease reflects an increase in gross margin that will be more than offset by an increase in SG&A expense due in large part to the Calvin Klein investments.

For the year we are projecting our Tommy Hilfiger operating margins to increase 10 to 20 basis points, our Heritage brand operating margins to decrease 30 to 50 basis points and our Calvin Klein operating margins to decrease 160 to 180 basis points.

Finally, we continue to project debt paydowns on track at $400 million for the year.

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

Thank you.

(Operator Instructions).

Bob Drbul, Nomura Securities.

Good morning.

Manny, I was wondering if you could provide a little more detail on what you are seeing -- I don't know if you want to comment by retailer, but on some of the initial Calvin jeans shops in the US or in Europe, if you could just give us a bit more flavor, color, any sort of sellthrough numbers or anything from that standpoint?

I know it's early.

Okay, with all of those caveats that you put in, I guess we are encouraged by what we are seeing both in North America and what we are seeing in Europe and Asia as well.

The initial reaction to the product has been positive.

Average unit retails out the door are up double digits.

As I indicated in our own stores comp store trends have improved and I believe that the product is much more in line where the brands position is in other product categories.

So I believe we have lifted the product.

The challenge now will be to bring the consumer along with us.

We feel positive about what we have seen particularly on the men's side and I think we still have some more work to do on the women's side of the floor as we go forward.

So that's a challenge in jeans.

I think the other challenge in jeans just to say particularly on the women's side is the category itself.

The category itself is under extreme pressure particularly from what I would describe as activewear, or performance wear.

Our Calvin Klein activewear business is very strong.

I think you saw that in G-III's results yesterday and I think that is taking some of the action off of the denim floor as well.

So I think it is that balance.

But early signs are positive.

The 20 shops that we opened in men's, which are basically in North America, we've seen really good sellthroughs there, double-digit increases against plan and significant increases against last year as we have also increased the square footage there.

Great.

And then, I guess the second question that I have is, in terms of the risks that remain around the Heritage business impacting your results similarly to how they did in the first half of the year, how confident are you today that the new estimates, the updated guidance fully reflects less risk around that piece of the business as we look to the full-year numbers?

Well look, Bobby, I think there's a lot of uncertainty in general, not just in our Heritage business but just look at retail in general and what has gone on.

I feel confident that inventories are clear now and it seems like sales trends are in line -- we are not dealing with the kind of difficult situation we saw in the first quarter last year when we were impacted by weather.

So I believe that will position us well.

I guess the only other thing I would mention is that last year's third and particularly fourth quarter from a margin point of view and a sales point of view at retail was just weak.

And I think the comparisons second half of the year are much easier than they were the first half of this year.

So that balance, clean inventories, it gives me confidence as we go forward.

But clearly if there is more pressure put at retail I think the business that we will see it first would be our opening price point Heritage business.

I think there could be some risk there but I feel given the strength in Calvin and Tommy that we can more than offset it.

Great.

Thank you very much, Manny.

Good luck.

David Glick, Buckingham Research Group.

Thank you.

Manny, just a question on the second half and the trends that you are projecting in excess of 15% earnings growth.

Are there any other investments that you anticipate in 2015 that you haven't previously talked about that would preclude or prevent you from continuing that momentum into next year as you will have anniversaried all of the big investments in the Warnaco business?

The issue will not be in the investment spending in our business above where we think it would be.

If there is risk to 2015 it will be the environment, the geopolitical environment, what's going on around the world and the macro environment.

As I sit here right now looking at the world, it is not the most stable situation and that gives me the greatest concern.

Got it.

And then a follow-up on Calvin Klein.

Your momentum in the Tommy Hilfiger business continues to be very strong, kind of in line with your long-term high single digit growth that you have been calling for Tommy Hilfiger.

Given your Calvin order book, are you at a point where you have cut the distribution and closed doors enough where you think you can really start to accelerate the Calvin business?

Obviously your fourth-quarter revenue projection implies a nice acceleration but you think we can finally get back to in line with your long-term outlook on Calvin Klein revenue growth?

I believe so.

I think between the product initiatives, the investments we have made, eliminating the headwinds that we are dealing with, particularly with getting the off-price channel to a much more rational level, those headwinds will be behind us.

So I feel that yes the growth is there, the opportunities are there to grow.

And then it is somewhat dependent upon the environment but I think we are well-positioned as we go forward.

Great.

Thanks, Manny.

Good luck in the second half.

Michael Binetti, UBS.

Good morning, guys.

Congrats on a great quarter in a very tough environment.

Manny, I know you love getting picked apart on details, so just a couple of questions here.

If I missed it, I apologize.

Calvin Klein order book for the spring, could you give us an idea of how that looks?

Yes, I don't think I did.

It's up double digits, 10%, 11% and that feels pretty good right now from where we are going.

I think we've talked with our retail customers they continue to be enthusiastic about the initiatives we are putting in place.

But to be fair to them they haven't seen any real selling of product except in our underwear business, which has been healthy throughout.

So we are really looking for the third quarter and the fourth quarter to be our stamp that we can really point to progression as we go forward from the selling point of view as new shops get in both in Europe and in North America.

And as you start to really flash positive sales increases with the retailers I think that's how you start to get more space, better presentations.

And I think that's what we need to see over the next 60 to 90 days and I think that could set us up well for second half of 2015.

Okay, great.

And could you help us understand the components of the gross margin improvement that we saw in the second quarter to help us think ahead a little bit as we move through the year?

I'm going to turn it over to Mike.

He will give you some of the details and I will fill in some color.

Yes, I guess from a mathematical perspective what you saw was the Heritage margin declined amid a little bit of a pickup on the Calvin and Tommy side so you really had a mix impact.

We were up a bit on margin to our plan.

It was really mix driven.

For us it was mix driven over the guidance.

Yes, and I would say is the Tommy business the performance was just great in the quarter.

I don't think there's any other word.

Both North America and in Europe and when you think about it I think in Europe we were significantly less promotional than a lot of our peers.

So we didn't try to steal business and drive it and I think that worked its way through the business as we have seen in the results.

Okay.

And then one last little question here.

If we look through the guidance a little bit and look at how Calvin should flow through third quarter and fourth quarter you are expecting a nice acceleration in the top line there in the fourth quarter, obviously.

There's a lot of dynamics going on there.

I wanted to see if you could help us understand how much of the acceleration in the fourth quarter is coming from things like finalizing the off-price de-stocking that you have talked about in Europe versus how much is coming from things like the AUR improvements that you talked about and the comp improvements in the business?

Thanks a lot.

It's hard to break it down in detail specificity.

But I would think as far as to give you some color on it, or give you how I would see it playing itself out, I think -- cleaning up the distribution, closing some of the unprofitable stores and whatever as we get into the fourth quarter, that's about half the improvement to get the base down.

Not having to again on expense leverage basis, not having the headwind of the investment spending as well will be a big benefit.

But I think about half of the benefit is also coming out of the new product initiatives and the anticipated increased sales that we were expecting in jeans and underwear.

So I really think it is give or take 50% each of where the improvement is coming in the fourth quarter.

All right, that's really helpful.

Have a great one.

Thanks.

Christian Buss, Credit Suisse.

Erinn Murphy, Piper Jaffray.

Hi, good morning.

Just wanted to follow-up on the strength in Calvin Klein Europe on the order book, Manny, that you alluded to for spring.

Are there any regions that are coming on stronger and then just what are you seeing generally right now in southern Europe?

Okay, I think Germany in particular is coming on strong and the UK.

Those are the two markets where we have seen strong improvement.

The Italian market both for Calvin and Tommy continues to be a drain, potentially not as severe as it had been but continues to be a drain.

The business in Spain for both businesses is actually starting to grow, again off of a base that over the last three years is down anywhere from 30% to 40%.

But it is no longer becoming, particularly for the Tommy business, it is no longer becoming a negative impact to the business as we go forward.

You didn't ask specifically but in Europe the biggest concern we have right now is our what we describe as our Russia business.

And that whole Middle East business, which combined, our Russian business is about a $100 million business and our Turkey/Middle East business is about a $75 million business with high operating margins meaning 14%, 15%.

That business has softened as you would expect given what is going on from a geopolitical point of view.

And how it plays out could put some real pressure on the business in the second half -- in the first half of next year.

So we are really watching that very carefully.

We are trying not to get stuck with inventory.

The Russia business is a distributor franchise operation to a great extent and there we don't want to put our strategic partner in a difficult inventory position so we are really working hand-in-hand with them as we go through that business.

So that has been a market that has been double-digit growth for us consistently the last three years.

So that is one area of concern that we have.

That and the Italian market.

Okay, that's helpful.

And then I think sticking on the European theme, you did talk about being less promotional I think both in Calvin and Tommy.

What is your expectation for just the overall environment in the back half in Europe?

Do you think it will remain in this less promotional cadence or do you expect the environment to pick up as we get into the holiday season in Europe?

I think it's going -- I am in no way indicating that I think that this will not be a promotional environment.

But I think there is a difference between what I would call normal promotional and having meant to deal with sales shortfalls and clear inventory.

That is the most expensive markdown, that's the markdowns that you deal with in the second quarter and the fourth quarter as you transition the seasons.

So as in the first quarter last year when we really fell behind -- the whole industry fell behind in selling trends -- we really had to get inventories in balance in the second quarter and it just cost a lot more to clear those goods.

Last year in the fourth quarter we really saw softening in general at retail starting in December which really caused the bulge of inventory that had to be dealt with upfront.

So I don't foresee that given the initial selling that we are seeing, given the overall inventory position that we see at retail with our key partners.

So I think they have done a good job of getting themselves positioned for the holiday selling season.

So I think we are in a reasonably good place as we go forward.

And like anything else not to play weather man, or weather person, I think the weather trends particularly here in North America have been positive for business for the selling of fall product and we had the complete opposite in the first quarter of this year.

So I think we have transitioned well from a seasonality point of view here, cleared goods, and are seeing some initial good selling of our fall product across the board.

That's great to hear.

And best of luck this fall.

Omar Saad, ISI Group.

Good morning, guys.

Nice quarter.

Couple of questions.

First of all on the outlet channel.

Manny, it is a big channel for you guys.

It has been a great channel for the industry in the last decade.

Went through a period, seems like a period of softness, seems to be coming out of that a little bit.

What are your thoughts on what has happened and happening there and how are you thinking about that channel from a traffic and consumer standpoint going forward?

I think the outlet channel for us, particularly at the premium brand level, and we would put Calvin and Tommy and some of the other competitors that are out there, I think even through a difficult first half of the year we saw real positive selling in our stores, low-single to mid-single-digit kind of comps, that doesn't strike me as a channel that is under a lot of pressure.

I know there has been some competitors that have had their own issues that had to deal with but I think on balance the channel has been healthier than specialty store or a mall-based retailer, so I've felt good about that.

I think when you get into a highly promotional environment like the end of the first quarter and the second quarter, I think it does put more pressure on the outlet channel because it is a value channel of distribution.

So I think it has experienced that and the healthiest environment for the outlet channel is when regular retail is doing well.

Because there is not a compelling message going on at regular retail from a promotional point of view.

This year's second quarter when you went to the middle of the mall, particularly at specialty stores, you saw prices that were dropped 70%, 80%.

The consumer didn't have to get in her car to drive to the store, to the outlet store.

So I think that always plays a role as well.

So I think as we are going into fall it feels much more balanced.

Thanks.

That's super helpful.

And then a follow-up on the gross margin questions.

Gross margin is up two quarters in a row after being down last year.

You are talking about taking the opening price point from $49 to $69, how long tailed can some of these gross margin opportunities be and where do you see that evolving and what is the opportunity not just the next quarter or two but over time?

Look, to put it into perspective our Calvin Klein European jeans business and our Calvin Klein North America jeans business, we put them together they are marginally profitable businesses.

There's no reason why those businesses over a period of time shouldn't be operating at let's just pick 10% operating margins.

Our other in-house Calvin wholesale businesses really track much higher than that but let's get the 10% first.

So we think over the next three years there is opportunity to take operating margins that today are 2% and really drive it.

The key is going to be, as I have talked about in the past, is we have got to increase the average unit retails on these goods, the out-the-door retails on these goods.

There has been much too much promotional selling, discounting of product, taking down the quality of the products.

So we are going through a transformation here and a major transition as we raise retail price points, training the consumer that this is the appropriate place for Calvin Klein jeans to be positioned at.

Does that put some pressure on retail selling?

I'm not sure.

All of our other products that bear the name Calvin Klein clearly transact at comparable price points be it in our men's sportswear business, our women's sportswear and classification business across low retail.

These are large businesses at Macy's and other department stores that are in the top quartile as far as out-the-door retail prices.

So we have consistently demonstrated that.

I don't know why jeans needs to be at a place that it is being going out the door at $25 on balance.

It's just not appropriate.

We should be much closer in North America to an out-the-door retail price all in, clearance, markdowns, selling T-shirts, everything, about $40.

So that's the opportunity.

The way we have it planned out is we will get there and we'll get there over a three- to four-year period.

We are not assuming it's going to happen overnight.

We hope that the initiative, the presentation will drive it faster but the financial plan is driven over that happening over a period of time.

Thanks, guys.

Really helpful.

Matthew Boss, JPMorgan.

Good morning.

Can you elaborate a little more into August, what you saw driving the acceleration at both Tommy and Calvin and how sustainable you think some of the acceleration is?

I don't know how much more explicit I could be.

I have given comps.

I think we have seen with our inventories position being in very good place, with our early selling of fall product happening, we have seen an acceleration of sales in North America in our retail stores and internationally in our retail stores.

I think just to put it into perspective, as we were coming out of the second quarter mid-July on we started to see an improvement in business.

And that trend has continued now for the four weeks of August.

So for the last six weeks we have seen healthy retail store comps particularly here in North America and in Europe.

And that gives us confidence as we go forward but as you know there's still a lot to go, a big holiday season.

A lot is going to depend on what is going on from a competitor environment.

I think we were well-positioned.

So the initial reaction to the new product that has gone in, I think that has been the biggest sign that we have seen so far.

So from that perspective we are taking a lot of -- we are feeling good about it.

But again we've got multiple deliveries that are coming month after month.

We have new product launches in underwear that are coming.

We feel really good about those launches but now they have to deliver with the consumer.

Great.

And then from an inventory perspective, clearly the channel seems in a better place today than three months ago.

It was a great call on your part in the terms of the way this was going to progress.

So what is the best way to think about potentially more conservative ordering trends out there so that people can maintain this with the potential margin opportunity?

It sounds like clearly a net positive but I just wanted to get your thoughts on the puts and takes out there.

Matthew, when we made the call in May it didn't feel so good, obviously.

That's what we saw and it seemed pretty clear to us that that was the way it was going to play out.

The inventories were too high.

The consumer, even though she was coming back into the store, average unit retails because you needed to be more promotional were just lower and you were selling more goods later in the season than the prior season -- the prior year.

So you just do the math, you don't need to be a genius to see this is going to be a problem.

But the big benefit that we see right now is as we have gone through one month of selling of fall we are not seeing the kind of trends and as we came out of the third quarter we started to see an acceleration, so looking at six weeks of business it is a trend.

How sustaining it is is going to depend on how the environment, what goes on with the consumer, the geopolitical factors that go on, so I think we are really sitting there looking at it feeling positive but there's still a lot to go in the second half of the year.

Great.

Best of luck.

John Kernan, Cowen and Company.

Hey, guys.

Thanks for taking my questions.

Congrats on a nice quarter.

Can you give any color on where you see sourcing costs going next year?

Obviously cotton had a nice move down here and we are starting to hear from some other of your competitors that are saying they do expect to see somewhat of a benefit.

So where do you see sourcing costs going next year and how much of a benefit do you think it can be to gross margin?

Well, I think there's a lot of dynamics going on from a sourcing point of view.

One is you are absolutely right.

Raw material costs, particularly cotton, we are seeing softness in and that is giving us an opportunity.

The offset to that is we are seeing significant increase in labor costs and also social compliance costs as you deal with the issues in Bangladesh and some of the other developing countries around the world.

So right now we are planning overall costs next year relatively flat.

Depending on product categories it moves around.

Some will have benefits that are very much cotton rich products will have some benefits.

But where we have more blended synthetic products we are actually not seeing a big benefit at all on the raw material costs.

So that balance I think is still being worked through and overall I think we are planning for flattish kind of product costs.

Okay.

That's helpful.

And then just to revisit the AUR story at Calvin Klein.

It seems like there is just a huge opportunity.

Are there any parallels to what you saw with the Tommy Hilfiger brand after you bought that?

I think there was a multiyear acceleration in AUR and margins coming out of that acquisition.

Where do you think a normalized operating margin for the entire Calvin Klein business sits as you look several years out?

Well, it's a great call out.

I think what you would like to see is you would like to see the business accelerate like we did see the Tommy business when we made the acquisition.

We saw a AURs increase, we were also able in North America to really bring some logistical power to the business and scale and really were able to help a great merchandising team logistically deliver product even quicker.

And we got all those benefits and we were able to raise average unit retails both at wholesale and at retail.

And you see the benefit of that, the Tommy Hilfiger North American business operates at about a 15% operating margin.

When we look at the Calvin Klein business, today it is somewhere just below -- we are projecting this year -- is just below 14% operating margins.

So we believe those operating margins should be north of 15% on an ongoing basis.

Some of that will play itself out potentially as we bring back in-house potentially more businesses and convert from a licensing model to a operating model at some of the businesses.

As that occurs you actually expect some depression on the operating margins but some real acceleration on the top line overall very accretive to earnings.

But again the licensing model is 65%, 70% operating margin business.

So that balance as we go forward.

So short answer is, I think there's 150 basis points of improvement in the Calvin Klein overall operating margins going forward that we should be able to attain.

If we get there I think that will be a point that we would take another look to see where this business should really move going forward.

That would be our goal over the next three years.

All right.

That's very helpful.

Thanks, guys and good luck.

Christian Buss, Credit Suisse.

Just wondering if you could talk a little bit about your expectations for the European market going forward?

How have your stores performed and what are your expectations for the back half of the year in your own stores, particularly for Calvin?

Okay, in the Calvin businesses for the first half of the year, comps were negative mid-single, high-single -- I'm sorry, getting the wrong number -- high-single digits, negative high-single digits, close to 9%, 10%.

A lot of that was the transitioning out of cheap product and not discounting and promoting as dramatically as it has been.

We have seen a significant turnaround in that business in Europe starting in the second half of July through August, with overall comping probably mid-single digits as we go forward in Europe; overall internationally, low-single digits.

So we've seen an acceleration overall in our international comps, driven principally by what we are seeing in Europe based on the positioning in-store of the product, some of the new presentations and the new product that we are seeing hit the stores.

So it has given us some optimism, but again as I said about seven times so far, it is still very early.

That's very helpful.

Thank you very much and best of luck.

Thank you.

Kate McShane, Citi.

Hi, thanks.

Good morning.

Mike, I just wanted to go back to your comment about the detail on softness in dress shirts.

I know that has been occurring for a little bit, but can you remind us what is driving some of that softness when we lap it, and what's being done to improve the business?

Yes, we have kind of -- the industry and the trend has been moving towards a fashion product.

It took us time to get back into that fashion product, so we have been -- we didn't plan that trend to change as quickly as it did.

We have moved towards fashion as we get into the latter part of the third quarter and fourth quarter, so we should be able to catch that back up and really recover in the -- at least make our plans as we move into the third and fourth quarter.

It's really been a basic and replenishment issue for us.

I would just add to that, I think Mike said it perfectly from that perspective, but I would add that basic margins tend to be higher than fashion margins overall.

So the mix of the business also moving from 30% fashion to 45% fashion has also depressed the mix of business and has put some pressure on margin as well as we have tried to balance our inventories we've had to deal with some liquidation of inventory to get it back into its right levels as we have gone forward.

So it has also been a top-line issue at retailers.

The category, which has enjoyed three years of really strong growth has really entered a period now as we have moved in fashion, dress shirts is trending low-single-digit-negative comps at most of our retailers and we are seeing pickup in woven sport shirts, which are much more fashion driven at the same time.

And I think we are in a bit of a fashion transition as we go forward.

Okay, that's helpful.

And I'm just going to through this question out there.

I think it might be a little bit of a stretch but do you think there's any readthrough to the health of the consumer, how the consumer is responding to promotions from the better-than-expected gross margins you saw in the second quarter?

No.

If you are talking about the overall -- I don't think you can take our particular situation and drive that through to the ultimate consumer.

I think that would be dangerous.

I think the consumer is very smart.

As we came into the through first quarter, there was -- I don't want to make it overly simplistic.

But business was as tough as it was, there was no need to go out and buy bright colored spring merchandise in March and April when the snow was still on the ground and didn't need to replenish their spring wardrobe.

As the weather started to turn she came back to the stores and it was piled high with inventory and needed to be promoted in order to drive.

She shopped and reacted.

The problem was we were selling probably on balance at retail more units but at 10% to 12% lower AURs to clear it.

So when you do the math that just put the pressure both on margins and you didn't get necessarily the kind of comp sales performance that you would have liked to see going forward and the comparison that you ARPUed for prior year.

So I don't want to overly simplify it but I think that's a lot of what happened as well in the first half of the year.

I think as we trend back I think she also understood that first quarter was a bit of an anomaly and it was a moment in time.

She clearly understands what value is at retail and when she goes into the store she is looking for that value but she also understands that the inventories aren't piled high and goods are backed out.

So she's making that judgment as she goes forward.

Okay, thank you very much.

Howard Tubin, RBC Capital Markets.

Thanks.

Manny, can you share with us in the updated thinking you might have on big picture acquisitions or divestitures?

No.

I think directionally we have been pretty clear.

I think we are on pause as we integrate Warnaco, get this behind us, get the investment spending behind us.

As we turn into 2015 we will start to think about bringing some businesses in-house.

But I think the kind of acquisition you will see us doing in the next couple of years will be bringing more Calvin and Tommy businesses in-house as opposed to looking at a third global brand opportunity at this point.

I think there is plenty of growth opportunity in the ability to really take advantage of the infrastructure that we are building internationally and that we have really invested in in Europe and in Asia to really take advantage of that infrastructure as we go forward.

So I would say I don't see a lot of acquisition activity at all next 12 months.

I think it is really 2016 and beyond kind of thought process.

That's great.

Thanks.

Steve Marotta, CL King & Associates.

Good morning, everybody.

Manny, you gave the number of shop-in-shops expected at the end of the third quarter globally.

Can you talk about what they will ultimately be and when that may occur?

And the follow-up question pertains to the CK Jeans spring 2015 line.

How does it differ from the fall 2014 line?

Are there more SKUs, is there a continued upward drift to a AURs?

If you could talk around that a little bit?

Thanks.

Okay, I don't know how to -- I think -- in North America and in Europe from as far as retail presentation and shop development, I would say we are just really breaking, touching the tip of the iceberg here.

We are not in all top doors even with this rollout.

Clearly on the women's side with only 50 doors there's a huge opportunity in North America.

There's an opportunity for at least another 300 doors on the men's side and 400 doors on the women's side in North America.

So I think that is really where we are focused on.

In Europe the Calvin Klein jeans business wholesale is probably $100 million to $150 million in total.

We have our own retail business as well but you put that into comparison with the Tommy business, which is over $1 billion, it just gives you a sense of the opportunity and how underdeveloped the business is in Europe.

Expansion is there, the opportunity to grow is there.

What is critical is we have to do it in the right way and it is going to take a level of time.

And like anything else with our retail partners we are going to have to demonstrate performance at retail in order to get greater square footage, in order to get more doors.

And it all comes down to product.

We have been deficient on the jeans side.

I guess if -- I don't know any other way to do it but if I was weighting the men's line I would say it was a 7 where it's on a 3 on a scale of 1 to 10.

I think over time it will get to a 9 or a 10.

It is just natural as you develop the line, I think the bottoms are very strong and the tops aren't where they should be and I think that will continue.

And the women's product, I think although it has been an improvement particularly on the bottom side, we have a long way to go on the women's product initiatives in the jeans area.

That's no reflection on our people and what has gone on but it's just a natural progression that you go through as you try to raise the level of the brand, its positioning, what the consumer wants with the brand, understanding what works, what doesn't.

I think we are learning and moving just as we did with some of the other businesses that we developed or with Calvin and Tommy over the years.

I think we are feeling good about it but we still have a way to go.

Thank you.

Evren Kopelman, Wells Fargo.

Thank you.

Good morning.

My question is on Calvin Klein.

Can you give us a little bit more color on the comp internationally by region, Latin America, China, Korea and also where the improvement in the August trends came from also on the international side?

The biggest improvement came out of Europe overall.

We saw some improvement in Asia, principally China.

The business -- the two businesses that internationally that has been soft for us have been Korea and China.

You have heard a lot of discussion about it.

The Korea business actually in the last four or five weeks we have seen high-single-digit comps move low-single to flattish kind of business.

So that trend has started to improve.

Our business in China also has improved somewhat but again that market has been such a driver for the Calvin Klein brand over the last three years that has slowed down.

Overall growth in China this year we are only planning at 4% to 5%.

And a lot of that has to do with just the environment, what's going on with the consumer there as things settle down.

So that is a market that we are really watching closely, managing inventories there.

We have a very high premium position, high profitability both in all of Asia.

That's a business we really want to protect and not really chase sales that are going to be unhealthy for the brand as we go forward.

So we see great opportunity for the brand in that market but right now the consumer is choppy at best as we go forward.

And I guess, operator, we are going to take one more question since we have another investor conference right after this.

So we'll take one more question and then call it a day.

Robbie Ohmes, Bank of America Merrill Lynch.

Good morning.

Thanks for taking my question.

Actually a couple of quick follow-ups.

Manny, the CK Jeans increase to $69.50, what is the out-the-door for the season that you are planning?

I guess do you think -- are you planning to end up with a higher out-the-door but actually coming from that much higher price point be on promo or higher percentage discount to the customer than you were initially planning last year?

That was my first follow-up.

Robbie, when we talk about the line it is not just the jeans component, that's a component of -- the denim component -- it's also a big T-shirt component, it's a large sports shirt component balance.

We are looking for AUR increases this year somewhere in the 12% to 13% range, but again that is off of a depressed base, that's how we are planning the business and we will continue to monitor it.

So we are looking for AUR somewhere in the approaching $30 out the door, which we still don't believe is where we need to be, but it is where we are planning the business.

So there will be points in time where we will be promotional both in denim -- it is a classification category and it has that component to it -- and in order to drive traffic and sales it may be necessary and we will watch that very closely with our retail partners.

But the financial plan, I think I have mentioned a number of times, is for a gradual improvement from $25, $26 to $40 over the next three to four years.

Got it.

And could you just remind us the CK advertising plan for the back half of this year versus the back half of last year?

It's up dollar wise somewhat.

CK has always spent a significant amount on the marketing.

We are reallocating some funds between -- from sportswear to jeans to underwear and doing what you would do naturally to drive some of the businesses.

But I think overall our second half of the year, our Calvin Klein business -- Calvin Klein advertising will be up somewhat.

And then just quick last question.

The IZOD Kohl's shipments, did those hit in the quarter you just reported, or do those begin in the third quarter?

Could you remind us how they play out?

It started at the end -- we started shipping 7/25.

They didn't hit the retail floor until about 8/15 and when I say hit the floor -- that's without any -- almost without any fixtures as was going through, so we were just starting to get position.

No marketing at all associated with it.

Initial selling has been very strong with no marketing and no callouts for the business.

The marketing launch is planned for next week.

I think it starts on September 7.

So we are feeling good about how that is going to shape up.

We think -- we have seen the shops -- the last two weeks -- they are in 1200 doors.

The shops look great.

The presentation is A+.

We love how it's been partnered with Kohl's to really get it positioned and we think we are in a real strong area.

It's really on the men's side.

It's sportswear, dress furnishings, suits and then also on the kids side as well.

So the brand will really be visible on that side of the store as we go forward.

So I think we are off to a good start logistically and position wise and initial selling, again, very modest but very good at that full price.

And a couple of hundred million dollars business annualized?

I think at retail dollars, I think the number I talked about being retail at Kohl's on the men's side, about $150 million as we get into 2015, 2016.

So I think that I'll have to do the math off of that.

So I think a lot like anything else is going to be how we perform in the third and fourth quarter.

Great.

Thanks so much.

Thank you.

Okay, I thank you all for your attention.

Thank you for joining us on the call.

Have a great back-to-school season.

Go shopping and we will speak to you in December with an update of the year.

Take care.

And that does conclude today's conference.

Thank you for your participation.