PVH Corp (PVH) 2014 Q3 法說會逐字稿

Good morning, everyone. Welcome to the PVH Corp. third-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, re-broadcasted, 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 any transcript or replay of this call.

The information being made available includes forward-looking statements that reflect PVH's view as of December 3, 2014 and 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 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, which can be found on www.PVH.com, and in 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. Please go ahead, sir.

Thank you. Good morning and thank everyone for joining me on the call. I am joined on the call by Mike Shaffer, our Chief Financial Officer; Dana Perlman, our Treasurer and Senior Vice President of Investor Relations; and Ken Duane, who runs all of our North American wholesale businesses.

Overall given the macro environment, we are quite pleased with our third-quarter results, which exceeded the top end of our earnings guidance by $0.06. The earnings beat was driven by the continued strength of our Tommy Hilfiger business and an improvement in the performance of our Calvin Klein business.

I could best describe the macro third-quarter business trends in all channels of distribution as very volatile. The quarter began in August with strong sales and margin trends. As we moved into September and October, we and the whole industry experienced a significant slowdown in store traffic both in Europe and North America, driven by unseasonably warm weather and less promotional activity at our stores in Europe.

Toward the end of the third quarter and into November, retail business has rebounded with an improvement in store traffic driven by colder weather and a heightened level of promotional activity in all markets.

Speaking directly about the Tommy Hilfiger business, on a local currency basis revenues for the business increased 3% while operating earnings grew by over 9%, driven by strong gross margin performance. In North America we posted a 1% comparable store sales increase and our operating income margins expanded by 130 basis points.

As we moved into the fourth quarter, comp sales trends have basically continued at this level, running about flat for the month of November. In Europe, comp store sales declined 5% in the third quarter, driven by the aforementioned slowdown in traffic in September and October due to the unseasonably warm weather and less promotional activity. Despite the soft sales, our European operating margins increased 100 basis points due to strong overall gross margin performance.

As we ended the third quarter, our European business bounced back with an improvement in traffic driven by colder weather and a higher level of promotions. November comp store sales in Europe are running up low-single-digits for the fourth quarter.

Our European wholesale business continues to outpace the competition. As an indicator, our spring-summer 2015 order book is up over 5% compared to levels in 2014.

Moving to our Calvin Klein business, revenues for the Calvin Klein business in the quarter on a local currency basis grew 3%, driven by a 5% increase in North America where we saw strong sales both at wholesale and at retail.

At retail, our North American stores posted a very strong 5% comp store increase for the quarter while our international comp store business sales declined 2% due to continued softness in Europe with weakness in Korea offset by strong business in Europe. Moving into the fourth quarter, Calvin Klein retail trends in November were on-plan, with North American comps up low-single-digits and international comps down low-single-digits.

Let me put little color on some of our new product deliveries for fall; I'm going to start the Calvin Klein underwear business. From a product point of view, we have delivered new core product along with significantly improved and elevated packaging.

The new product features have been significantly enhanced from a quality point of view. We have significantly better fabrics, improved waistbands, and enhanced styling. We have also invested in our point-of-sale presentation with new advertising graphics and fixtures throughout North America and Europe.

In addition, we have upgraded and installed new shops in key markets in the US, in New York at the Herald Square location and at Lord and Taylor Fifth Avenue, in Florida at Aventura, and in California at Beverly Center and the South Coast Plaza. Additionally, we have installed new shops and stores internationally in key markets.

In particular I'd call your attention to the Macy's Herald Square store where we have our largest department store shop-in-shop in the world at about 2,500 square feet. That shop was installed in the middle of the third quarter this fiscal year. I think it would be well worth your while to go in and see that presentation and the dramatic representation of the Calvin Klein men's underwear business there and the Calvin Klein intimates business there. We are seeing sales at that location up over 50%.

In the Calvin Klein jeans area, new product has been delivered and we are seeing good reaction from the consumer, particularly where we have installed our new jeans shops. In North America we have installed 180 shops in the third quarter, 115 men's shops and 75 women's shops. Since we have installed these shops we have experienced a 40% sales increase over last year.

Season to date, our AURs are running up between 10% and 15% over the prior year. We are scheduled to open an additional 25 new shops in January and are targeting 150 new jeans shops installations for fiscal 2015.

In Europe we are in the first inning of our turnaround in jeans. We've installed over 80 new jeans shops throughout Europe. We have significantly improved the quarterly level of our European jean lines with better fabrics and trims. We have begun to see an improvement in AURs and our spring/summer 2015 order book for Calvin Klein is up 10% over 2014 orders.

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 some nice improvements in sales trends for both genders.

Moving on to our Heritage business, Heritage revenues increased 3% in the quarter, driven by a 6% increase in wholesale sales, offset by a 6% comp store sales decline in our Heritage retail business, which continued to perform at weak levels.

We have seen strong performance in our Heritage wholesale sportswear business with our Izod and Van Heusen brands. In particular, our lunch at Kohl's with IZOD has been very successful and we are exceeding our initial sales projections.

Overall earnings for our Heritage brand businesses in the quarter was down 15% as our American moderate brands were most severely impacted by the heightened promotional activity, particularly in our own retail stores. Heritage retail continues to be a major area of underperformance for us.

Finally, I would just like to speak a little bit about our guidance before I turn it over to Mike. We revised our guidance for 2014 to $7.25 to $7.30 per share. The takedown was solely related to an $0.08 impact relating to the strengthening of the US dollar against major currencies. We believe we are well positioned to successfully navigate through the expected volatile and highly competitive environment in the fourth-quarter holiday selling season.

As a reminder, in the second half of December and through all of January our sales comparisons, particularly in North America, become much easier relative to last year. And with that, I would like to turn it over to Mike to quantify some of those 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 third quarter were $2.23 billion, a 2% increase over the prior year when excluding the Bass business, which we sold to G-III last year.

The impact of the strengthening US dollar was felt across all of our non-US businesses. Excluding this FX impact our revenues were up 3%. On a constant currency basis, our Calvin Klein and Tommy Hilfiger businesses were each up 3% and are Heritage revenues were also up 3% excluding Bass.

Our earnings per share for the third quarter was $2.56, a $0.06 beat to the top end of our previous guidance and an 11% improvement over last year. The beat was primarily driven by better performance in Calvin Klein, due in part to an earlier than planned shipment of holiday products and the shift in marketing expense into the fourth quarter.

Also impacting the quarter was a favorable tax rate as a result of timing, but this was offset by the impact of the strengthening dollar and continued underperformance in our North American Heritage business, which fell short on gross margin due to heavy promotional environments.

For the fourth quarter we are projecting earnings per share of $1.71 to $1.76 or an increase of 20% to 23% over the prior year. Earnings per share and revenues for the quarter will be negatively impacted by the continued strengthening in the US dollar. Revenues for the quarter are projected to be about $2.1 billion or an increase of 3%. On a constant currency basis, projected revenues for the quarter are proximally 6% greater than the prior year.

Our earnings per share for the full year 2014 is now planned at $7.25 to $7.30. We revised our guidance down as a result of the impacts of the strengthening US dollar and corresponding FX impact, which negatively impacted our earnings by approximately $0.08.

Our revenues for the full year 2014 are projected at $8.3 billion or a 3% increase over the prior year, excluding Bass. Tommy Hilfiger and Calvin Klein are planning to have revenue increases of 5% and 2% respectively.

Our Heritage revenues are planned to be flat for the prior year excluding Bass. Our downward revision to revenue guidance reflects the negative impact of FX primarily due to a weaker euro on our Tommy and Calvin Klein businesses, as well is the impact of weaker fourth-quarter sales in our Heritage division.

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 increased Calvin Klein investments. We have not reduced our Calvin Klein investment spending from our initial budget and will continue to make all the necessary investments to grow Calvin Klein for the future.

For the full year, we are projecting our Tommy Hilfiger operating margins to increase 20 to 30 basis points. Our heritage Brand's operating margins will decrease 60 to 70 basis points and our Calvin Klein operating margins are planned to decrease 170 to 180 basis points.

Finally, we continue to pay debt -- we continue to plan debt paydown at $400 million for the year. With that, we will open it up for questions.

(Operator Instructions). Bob Drbul, Nomura Securities.

Good morning. I guess the first question I have, Manny, on the Calvin Klein jeans AUR increases, was that for both men's and women's?

Yes, we are seeing a significant improvement beginning in September on all AURs between both genders. And it's really being driven first and foremost by a significant increase in our opening price denim, basic denim jean product, in both genders, where we've moved the opening price point from $49.50 to $69.50.

We've been able to put a better product on the floor, better piece goods on the floor that the consumer can really touch and feel. And we seem to be -- and we are getting paid for that as we go forward. And we think that's a much more appropriate price point for the Calvin Klein brand to open up with on the denim floor.

Okay, and I have a question on currency and gross margin. As you look sort of for the rest of this year but also into next year, can the gross margins be positive next year with the euro being at $1.24? How should we think about it given the transactional nature?

I think on the transactional side, I think for the first half of the year margins specifically, since we hedge out currency, we are probably -- we are secure against that for that piece of the fiscal year as we go forward. The exposure would be on lower translation rates for the second half of the year as we go forward. From a transaction point of view that could impact gross margin.

On a translation basis, top-line and then just translating the bottom-line, obviously we are exposed to the full year as we don't hedge translation. So that is going to be a headwind for 2015 as we go forward.

Got it. And then just one last question, Manny. So you guys I think are one of the first to talk post-Black Friday and post last week. Can you just talk about the surprises or the trends both on your wholesale business but also on your retail and sort of how you are sitting with the inventories at this point in time?

Sure, I guess I would say is -- here is how I would describe November. Business bounced back in November coming off of a particularly soft October, unseasonably warm weather both here in North America and in Europe. The third quarter as we finished up was particularly weak. As the weather got cooler business did bounce back.

Also promotions clearly got pulled forward as the Black Friday frenzy really expanded at a minimum one week and, in some cases with some key retailers really, went all the way through the whole month of November.

So the selling was strong at the beginning of November through mid-November. And then as we got into Black Friday, look, you've heard all the reports. Business softened. We got some excitement on Thanksgiving, the Black Friday, and then the weekend was soft relatively speaking.

So I really think it's important that we look at November in its totality. And November in its totality, the best that I see, my visibility outside of our Company and looking at some of our key customers is they are running on plan -- started stronger, Black Friday week was okay but not great, then that weekend softened. And now it's really about how the process moves as we go forward.

Our inventory position coming into the third quarter and back-to-school was very clean. And I think you clearly saw the benefits of that in the third quarter on the gross margin line in all of our business. But in particular the Tommy Hilfiger business on the Calvin Klein business where we really saw expanded gross margins.

And we didn't jump into the promotional frenzy that began in October, we just didn't participate in a full way there. But given the competitive pressures right now we need to meet the competition as we go forward. So where I see risk is really on the gross profit line just driven by the promotional level.

Now last year December and January were very promotional as well. So I think as we've gotten through November that's been the toughest comparison both from a margin and a sales point of view. And I feel good how we have come through that.

But I think now coming ahead of us, particularly beginning December 14 or so, we are up against some winter storms, we are up against some really tough business for a while. So I think those comparisons get easier. And I'm expecting and anticipating an acceleration of comp sales going into the back half of the fourth quarter.

Great. Thank you, Manny. Good luck.

David Glick, Buckingham Research.

Thank you, good morning. Two questions, one for Manny. Could you size up kind of where you are on the Calvin Klein jeans business in global revenues? And where you are in terms of getting past some of the decreases in distribution to the off-price channel and the club channel? And just how to think about the revenue and profitability of that business and what kind of improvement you can expect going forward?

And then secondly for Mike, the implied SG&A growth in Q4 is certainly greater than Q3. You have anniversary a lot of the Calvin Klein investments. I am just wondering if you can walk us through what's driving the SG&A increase in the fourth quarter.

Okay, let me just deal with the jeans. Michael will deal with the SG&A question. I will focus on jeans.

On the jeans side, I guess I would describe it this way, is the cleanup of the distribution in Europe, Asia, and in North America will be completely behind us in 2014. So we -- the benefits that we will start to see is we won't be up against a lot of that clean up and elimination of that off-price sales as we've gone forward.

As we've talked about, the jeans business round numbers worldwide is about $1 billion in sales -- the wholesale retail all categories. The challenge for us is the weakness in the business and where the margins are significantly underperforming is first and foremost Europe where the business on an operating margin basis is actually losing money.

Overall the European Calvin Klein business is at best a breakeven business with underwear being profitable and $250 million of jeans and related apparel being sold into the market at operating margins that are negative. So the opportunity there over time is to take that business, grow it substantially, and to get it our first goal would be over the next four years to get it to about a 10% operating margin.

In North America it is a profitable business but it is below our benchmark levels for Calvin Klein. I would describe it as a mid-single-digit operating margin overall, men's being more profitable than women's.

And I think the opportunity clearly there is to as we increase our presence on the retail floor, as AURs continue to improve and we get the benefits of less vendor markdown support for our retail partners, the opportunity is to bring that to where our men's sportswear operating margins are, which is in excess of 10%.

So I think those are the opportunities ahead of us where we are on a level playing field today that we are not dealing with the headwinds that we had in front of us from a distribution point of view and cleanup of off-price. And now it's improve the business, it's blocking and tackling, continuing to install new shops as we go forward.

And I think the onus is on us to really see that performance start to improve 2015 and beyond. On the SG&A question I guess I will turn it over to Mike.

And then when we look at the fourth quarter we are thinking about SG&A as a percent of sales being fairly flat to the prior year. The dollar growth there is just normal dollar growth, it's 2% to 3%. And then it's also had a slight impact because we did shift some marketing out of the third quarter into the fourth quarter. So I don't -- it is pretty flat on a percent of sales basis.

Okay, thank you. Good luck in the holiday quarter.

Erinn Murphy, Piper Jaffray.

Great, thank you. Good morning. I was hoping you could spend a little bit more time speaking about the Calvin Klein international trends quarter to date. Could you just maybe parse out what you are seeing both in Europe and Asia in that business?

Sure, I guess what I would say is the comps right now are running flattish in Europe and in Asia they are running down 2% to 3%. The softness in the Asia business continues for us to be the Korean market.

If we're disappointed in anything on the Asia business, it's the volatility in China. That truly from our perspective is a market dynamic that we are seeing particularly in the two major cities, Shanghai and Beijing, where we just see pressure on traffic where with that domestic consumer in particular.

Our Southeast Asia, Hong Kong, Macau, Taiwan business, major markets there continues very strong as we go -- as we see that. And I would say from a Calvin Klein performance by product area, the underwear performance just continues to be outstanding for us.

We've seen strong performance, perfectly fit for us in the Calvin Klein intimates business in Asia. Depending on country it's the number one/ number two collection country by country. So the strength of that business just continues. And I think one of the challenges we're dealing with is the malaise that's going on particularly in China and some of the Asian markets that are being impacted by a lack of Chinese tourism and spending in that market.

So we have overcome all of that, continue to deliver. Asia for us continues to be, with the exception of Brazil, our highest profit margin business globally for any of our brands. So it continues to be a stellar performer for us. We would just like to see more growth in that market.

If you go back two years, obviously that market was growing double-digits for us. We would like to get back to that trend, but right now the macro environment doesn't seem to be supporting that.

That's helpful. And then just in Europe, if you think about that order book for Calvin Klein for next year, can you just remind us kind of the key markets that you will be expanding that line into?

I think the two biggest markets we will see a significant expansion are the UK and Germany. And Calvin has always had a big position in Italy and in the Italian market we are actually pulling back as we cleanup distribution there.

And as just the difficulty that that market has experienced we haven't seen -- out of all the markets in Europe when we look at our Tommy Hilfiger business, the Italian market is the one that just continues to suffer. And unfortunately the business we acquired, our biggest market in Europe was the Italian market. So that has been a real challenge for us as well.

And then I have to add the second largest market for Calvin Klein is Russia and that related Middle East area. And although that business has remained nicely profitable, clearly we've seen some drag on sales there and a very careful buying for 2015 as we go forward.

So the 10% growth -- and if you look at Germany, again, we were very small in Germany so on a percentage basis the numbers sound spectacular but it's on a very low base. And if you look at the growth we see in the UK, it's very healthy. France and Spain very healthy growth, but two markets that are holding that down significantly are -- is the impact of Russia and the whole Italian market where Calvin had its biggest position. I hope that helps.

That is very helpful. And just the last question, on the Tommy Hilfiger business, the revenue guidance in the fourth quarter, if I was just to adjust for the currency headwind, it is up a very nice 10%, which is a good acceleration in the third quarter. Can you just help us think about some of those key drivers that's driving that reacceleration as we get into this final quarter of the year? Thank you.

Okay, so there is a significant year-over-year square footage expansion in our retail business that continues to drive that in the Tommy Hilfiger business, both in Europe and in North America. And in addition, our wholesale shipping timing, if you look at the wholesale business in the third quarter, it was relatively flat.

We are seeing significant increase in sales trends and that really just has a -- that's really much more related to delivery of product as we go forward and the timing of shipments. And really to get a real sense of that business you should put the two quarters together and you would see it's probably worth about 250 basis points of the increase for the quarter.

Great. Thank you, guys.

I hope that helps.

That helps a lot.

I guess a final point Mike just mentioned to me is we are planning for Tommy Hilfiger comps, both in Europe and North America, at about a 3% growth for the quarter overall. And a substantial amount of that is coming out of November -- December and January as we anniversary some very soft business, driven by a lot of whether implications last year.

So to remind everyone, our post-Christmas business is almost as big as our Christmas business, given the nature of our North America business, which is tourist destination locations throughout the United States. That business is very strong post-Christmas and last year that business was really negatively impacted by a significant amount of weather issues.

So we think there is some real opportunity for us as we go forward. And that is yet to come, but that is part of what we are counting on as we go forward.

Great. Thank you, guys, and best of luck this holiday season.

Michael Binetti, UBS.

Mike, I just wanted to follow-up with you on the comments for the SG&A in the fourth quarter being up I think dollars 2% to 3% and flattish. That -- I just want to make sure I understand if we calibrate to where you guys are headed for the operating margin for the year, that that has the gross margin -- the year-over-year gross margin improvement decelerating quite a bit in the fourth quarter. And if I'm right on that could you maybe help us speak to some of the components there again?

Sure, a couple things. I agree with what you said. So we are pretty much flat on an expense margin. Gross margins are fairly flat as we look at the fourth quarter and the biggest driver there is mix. We are seeing in particular the European business, while growing, the FX and the impact there is just a mix between the businesses. Our businesses are performing fine but it is mix.

We've got retail. What happens also is with the retail expansion and square footage that we have really going on and it's a big impact in the fourth quarter as prior year stores coming on and current year stores coming on --.

The operating margins in wholesale and retail are very comparable, but the mix of SG&A to gross margin is significantly different, 1,000 basis points different, higher gross margins retail businesses overall. That really changes the mix as we go forward.

So you really see that in the Tommy business and to some extent in the Calvin Klein business. So some of what you are seeing is just a mix of business as we go forward into the fourth quarter.

And just to say, we do not lap that Calvin Klein investment expense and that's why you are not seeing any more deleveraging on the SG&A. We just -- we level off in the fourth quarter.

Got it and then if we just step back and look at -- just a couple of strategy questions really quickly. As you look at -? Manny, if you look at Heritage retail, you voiced your displeasure with that for a while and maybe just think ahead of like what the strategy is as you look to 2015 and what you think you could do to fix that or right size the business if that's the direction.

And then maybe if we look at the licenses that are outside the Company for Calvin and Tommy that you've talked about perhaps someday being businesses that you would like to operate, maybe how we can think about those businesses, where you think you need your net debt to be to start going on offense and saying it might be time to start bringing some of these in again.

Okay, two very different questions. Let me deal with the Heritage retail question first. Heritage retail overall is about -- represents about 4%, 4.5% of our total volume, two divisions, IZOD and Van Heusen. Clearly we've been -- for the last two years we have been significantly contracting that business. Last year we sold off the Bass business, which was almost 45% of the total Heritage business. And I think as we go forward you will continue to see more contraction in that business.

The business model just doesn't work any longer for moderate priced brands in the outlet channel in North America. The outlet channel in North America has become a designer showcase brand with the like of Ralph Lauren, Tommy Hilfiger, Calvin Klein, Coach, Michael Kors, those are the big players there. And I don't believe moderate brands can continue to compete in that environment as we go forward.

So where we are given the leases and how we are moving in a very disciplined fashion, continuing to contract and shrink that base as we go forward. And I think that will be a direction that will be going on for the next 24 to 36 months as a go forward.

On our growth initiatives, really with the two big brands, Calvin Klein and Tommy Hilfiger, that represent about 75% of our volume and 85% of our profitability, we think we are at a point now where we are starting to think about and strategize what businesses should come in.

The integration of the Warnaco businesses are clearly behind us now. We have some small systems integrations going forward that will be complete by mid-2015. But the majority of that is behind us.

And I think -- first and foremost internationally Asia, both China and Southeast Asia markets, the Hong Kong market, Macao, Taiwan, those are areas that are very interesting to us. That we would like to look at potentially being more actively involved in the direct operation of those business when it comes to Tommy Hilfiger, particularly since we have such strong operating platforms in Asia with the Calvin Klein businesses today.

In a similar fashion when we look at Latin America, Brazil and Mexico, I think maybe just a little bit longer out do there maybe looking out maybe 24 to 36 months, looking at those businesses and also looking at the Tommy businesses and trying to make a decision about what businesses there we should be operating directly given our very successful Calvin Klein businesses in those markets.

And then on a category basis we are always looking at some of the men's categories here in North America like tailored clothing and the women's opportunity, which G-III has just done a spectacular job in growing that business from levels, continues to put up substantial sales increases with the Calvin products, doing it in a quality way as we go forward.

So they are a great strategic partner and we look for more ways to work with them together to grow that business and to look at maybe some creative ways of doing it together.

Thank you.

Christian Buss, Credit Suisse.

I was wondering if you could talk a little bit more about how the new shop-in-shop rollout is going and what the plans may be as you look towards 2015 for that.

Sure, I guess I'll speak -- I touched on it, but I will just say we installed in these -- we will install through the second half of 2014 in total over 200 shops, both men's and women's, probably 60% men's, 40% women's.

Those shops have performed exceedingly well. We are seeing sales increases in those shops of in excess of 40% over prior year levels where we have the ability to control the space, present the Calvin Klein denim product in a fashion that the brand deserves in a manner that is consistent with what we do across the store in all other categories, men's sportswear, tailored clothing, moving to the women's dress side, women's suit side, women's sportswear side, our accessory businesses.

We've got major presentations in the stores that the consumer can see, shop, where we are able to put our marketing and graphics in to really attract the consumer to the space and then have the right product for them to find. We really didn't -- we did not want to make those investments in fixtures and then disappoint the consumer with inferior product and we felt the product wasn't up to the level of the shops that we were looking to invest until we got to fall 2014.

We've put those in. We have seen a significant increase in that sale and in [AUFRs]. So that's where we are. We feel really good about that. I think the -- for the back -- I think we are looking at approximately about -- approximately 150 new shops that we are targeting for 2015 in North America solely in major doors, both Macy's, Lord and Taylor, Dillards, our key retail partners.

We will be investing significantly in fixture and presentation. And with the new product we think that product will see strong sell-through. So that just continues.

We are still not in all the key doors that we need to be -- even in Herald Square where we have a nice presentation, we haven't really installed the new shop because they are going to their home remodeling of that Herald Square store. 2015 there will be a major Calvin Klein jeans shop going in, both the men's and women's. So I think that trend will just continue.

The product is evolving and I think we will start -- we will be paid for that as we go forward. Denim is a challenged category, as we all know, particularly on the women's side much more than the men's side. So we are dealing with that headwind, but even with that we are starting to see some good sell-throughs and some improvement in AURs as we go forward.

That's very helpful. And could I ask how many shop-in-shops do you currently have for Calvin Klein jeanswear in North America?

A little bit over 200 shops. I would describe everything else that's out there -- we are in about 700 to 800 doors. I would describe that as pulled-together fixtures that we are not necessarily the most proud of the way those look. Those are left over from the Warnaco days. We have tried to at least get better fixtures on the floor in those markets and also tried to improve the merchandise presentation with new graphics, fresh graphics, changing out the graphics on a quarterly basis rather than once a year.

So we are doing things in those markets, but working with the stores to get the proper presentations in those stores. We don't want to just open shops in stores if it's not the right location and if we are not getting the appropriate support at the store level. So we are making those decisions door by door, working very closely with our key retail partners.

That's very helpful. Thank you so much, and best of luck.

Joan Payson, Barclays.

Just touching on Tommy, I think a couple of years ago, you had laid out a target of 14.3% for operating margins. And just given that those margins are outperforming the way they have been this year, has the target changed at all?

Okay, so we are operating today in the Tommy Hilfiger business at about 14%. I think given -- I have to answer this in two ways. Given the current licensing structure, meaning that our Asia business today is 100% licensed basically and our Latin America/South America business is also 100% licensed, we believe there is 50 to 75 basis points of improvement on that structure.

Going forward if we were to take back in the Asia business or the Latin America business, we believe those businesses should be operating at 15% operating margins. But I do have to remind you that at the same time, those 15% operating margins we have to eliminate the licensing margins that come through at 100% gross profit, and we are.

So I think from an incremental profit point of view and our return on investment, taking those businesses back in-house would be a home run, but it has the potential to impact slightly the operating margin. So I think conservatively speaking, we think we should be approaching about 15% operating margin for the Tommy Hilfiger business over the next three years.

Great, thank you. Also as we wind down the debt repayments for this year, what are the plans for that going forward and paying down the rest of the balance?

I'm going to make Mike handle that and I will jump in.

Look, we are going to continue to use free cash flow to pay down debt. It is our top priority right now for cash. So that is our goal, is to pay down the debt and continue at about the same kind of capacity we are paying down this year.

I think, Mike, I, Dana, we have been really -- along with our Board, we have been looking at this as we go forward. As you know, as restructuring with the Warnaco transactions behind us and as some of that cash flow that we need to put back into that business in the form of capital and restructuring expenses is behind us, our businesses are just inherently cash flow very positive.

So last year in the year which I would describe is very capital intensive from an investment point of view and from a continuation of the restructuring costs associated with Warnaco, we generated $500 million -- we paid down debt of about $400 million. I think that number starts to really significantly grow $500 million to $600 million each year as we go forward.

And the real question comes down to we want to continue to pay down debt, but we also want to look at the strategic acquisitions related to both Calvin and Tommy of bringing back some of our licensed businesses in-house.

And secondarily I think as the debt level gets to a point that we are very comfortable with next year, we will start to look back should we be buying back some stock and return some of this cash flow to our shareholders in the form of a stock buyback or whatever.

So all of those things will be on the table once we get through 2014, really see what 2015's cash flow looks like, our Board, along with the senior management team, will be looking at how best to use that free cash flow.

Okay, great. Thank you.

Matthew Boss, JPMorgan.

Good morning. It's actually Annie on for Matt. Piggybacking on the Calvin margin question, should we still be thinking about 13% EBIT margins for total Company over time? And how should we be thinking about the timeframe for that?

No, I think as we have clearly talked about that we think the Calvin Klein margin opportunity, which this year will be about 13.5%, we think that has at least 150 basis points of opportunity as we go forward over time. So I think that business historically for us, prior to the Warnaco acquisition, operates substantially higher than that.

But as we pro forma Warnaco -- the jeans and underwear business into that business model, getting that to a reasonable return level, we think 15% is a very appropriate interim target for us as we go forward. And we think that is incitement for us over the next three years.

Okay, and then for total consolidated Company, should we still be thinking about 13%?

The way I think you have to look at that is you have to look at -- I think is our goal on Heritage is 10%. Our goal on Tommy and Calvin is at this point about 15%.

So a lot -- a substantial amount of what our margin will be will be driven by what each of those components of those businesses represent. And how that changes over time given contraction of some of the Heritage businesses as we go forward and some of the growth opportunities, both organic and from an acquisition point of view, happen with Calvin Klein.

So I think giving us a Company target is not necessarily the best way to look at it. I think it should be a model that is constantly updated based on where we are with those three businesses, because those businesses are just so different.

Great, thank you so much.

Dana Telsey, The Telsey Advisory Group.

Good morning, everyone. Manny, can you give us your thoughts on the moderate department store channel? It sounds like the Kohl's launch is going nicely, JCPenney is improving. What are you seeing there -- anything that's changing with the customer there? And then any other new brand introductions that you would take a look at that could be coming up? Thank you.

Okay, so I would -- our JCPenney and Kohl's business in sportswear couldn't be healthier. We are seeing just very strong performance there with those two brands.

We are seeing on the intimates side -- we don't talk about it a lot because it's just not a big part of our business overall -- but the Warners and Olga business, our core intimates business, is just having a very strong year in all channels of distribution, but particularly with Kohl's and JCPenney, new presentations.

We have allowed that business for the first time in years to actually invest back into those brands. It was really a significant harvest strategy that Warnaco had with both the core intimates business and I would say the Speedo business.

And we have allowed the businesses to invest back into those businesses, both capital and some level of marketing at point-of-sale and in fixtures investments. And the customer consumer has really reacted with both brands to that so we're seeing nice payback there.

And with our Warners business, that's really a mid-channel play for us in a big way, our biggest customers there are both JCPenney and Kohl's. So that business is very healthy with those to mid-tier department stores.

And then finally I would just say is the one business at wholesale that has been more challenged across all channels of distribution has been our dress shirt business. As a category, dress shirts are just in a negative sales, low-single-digit kind of business, really being driven by fancy dress shirts, which just don't carry the same gross margin.

The basic EDI replenishment businesses, that business is just going through what I would describe as a normal cycle it goes through it seems every four or five years. As the business evolves I think we are well-positioned there, but that has been a more challenged business for us.

At this point our growth with Kohl's and Penney is very healthy. Our relationships couldn't be better. We are investing on the floor with -- on with shops with those two key retailers for us. I think their businesses in November have been healthy.

I don't see their entire year (inaudible) business, but I see our businesses. And our business there has been healthy and I think that is reflective of how they are performing in November, which is basically on plan. So I think we are happy with those relationships and our performance in that channel of distribution.

I don't see us growing with additional brands at this time in that channel of distribution, but I do see with Kohl's that the IZOD business will continue to expand in some new categories and really giving us an opportunity to expand the IZOD presentation with Kohl's very successfully for both of us. And they are really on top of it there. So I think you will see even a broader presentation for spring and then fall 2015 in Kohl's across the store.

Thank you.

John Kernan, Cowen and Company.

Manny, helpful color on the Tommy Hilfiger licenses in regions that you are not operating directly. Can you remind us the relative size of those businesses and what they are doing with the dollars at retail, just so we can try to understand what the boost to top-line will be if you bring some of these businesses back in-house?

Sure, I think if you took it all in on the Tommy side it's about $1 billion and on the Calvin side it's about $1 billion in sales round numbers, $1 billion -- so let's say $750 million to $1 billion for both opportunities.

Given the growth that's going on particularly in Asia and Latin America, those numbers, depending when we did the transaction, could be higher at that time. But what we are seeing in most of those markets since Tommy is at the early stage of development in those markets, a lot of those markets, we are seeing double-digit kind of sales increase in our license business there.

So, and to remind everybody, in some of those key markets, Brazil and China and India and as well as Australia, in those four key markets we are joint venture partners there. So we don't get to report our profitability -- our sales in those markets, but we do own between 40% and 50% of those businesses.

So it clearly gives us a real insight into those businesses and understanding of what's going on there. And obviously it gives us a direct path to acquire the business as we go forward over time.

Okay, that's really helpful. And then just on the Calvin Klein international business, the margin improvement year-over-year there was noticeable, given that the FX headwinds you clearly faced in the quarter. Can you remind us where the European Calvin Klein profitability stands?

I know when you bought it from Warnaco it was barely profitable after previously being a double-digit operating margin business. So where do you stand in some of those international Calvin Klein regions where the profitability was very depressed when you bought the business from Warnaco?

Okay, so Europe is really the market where the Warnaco Calvin Klein businesses were depressed. It's about a $450 million business, ongoing business since we are cleaning up distribution as you look at it. And that business today given the investments that we have put in above where Warnaco is, where Warnaco was at a marginal profit of 1% to 2%, we are today at a marginal loss of about 1% to 2%.

So as we look at it, the opportunity is a 1,000 basis point improvement over time in that business as we get it to a scale and we start to be paid for the investments that we are making in the business. And as our Tommy Hilfiger management team operates that business clearly on a much, much larger Tommy Hilfiger business in Europe, they are earning in excess of 15% operating margins.

Our initial goal over the next four to five years is to get Calvin to about a 10% operating margin business. And that is where Warnaco operated a jeans underwear business in Europe if you go back to 2008 and 2009. Operator, since it's after 10 o'clock, we are going to make this our last question. Thank you.

Eric Tracy, Janney Capital Markets.

Thanks, guys. Thanks for squeezing me in. Manny, just a follow-up on that CK Europe business, jeans in particular, can you just sort of -- I get it's over a four-year period to get back to that 10% level, but maybe just a cadence. Is there anything incremental that needs to be done from a spend perspective or should be relatively step function from here in terms of improvement of that profitability?

In order to get the 10% operating margins, the business needs to also scale. Given that if you look at the European business model, we have the diversity of country, the need to have an expense and organizational structure to support a pan-European business, that business in order to get to a 10% operating margin needs to be at about a $750 million base of -- sales base across the market.

So there will continue to be investment spending as we grow the business normally as we put shops in where we are. But what you should see, and this is how anybody is going to budget or project a business. If you're going to go from breakeven to 10% and you're going to do it over four to five years, what you're going to see in the business plan from any management team is it goes from 2% to 4% to 6%, 8%, 10%.

What we are hoping for given our market expertise and given the strength of the team that we have in Europe that runs the Tommy Hilfiger business that we are able to leverage and our past experiences with acquisitions, the Tommy acquisition, the initial Calvin acquisition is what we would like to do is actually accelerate that timeframe and obviously that's our goal.

But if you are asked me what our financial plan is, it's that steady growth trying to grow operating margins 200 basis points a year and working our way up over a four to five year period approaching 10%. So that is our goal. That is how we've planned it financially. That is what I'm willing to commit to with the understanding is that we are doing everything possible to accelerate that turnaround.

And then if I could just switch to Tommy, I just wanted to clarify -- I mean really decent profitability in 3Q in that business. Sales [deceled], the expectation that it re-accels in 4Q. You mentioned that the environment got more promotional.

Is that your expectation as well, that you guys participate in that and so the actual operating algorithm doesn't really change? Or is there -- potentially you accelerate sales and actually hold the profitability as well?

Okay, it's a great question and the best answer I can give you and the fairest answer I can give you is I don't think anybody knows at this moment in time. I think we have planned it prudently. I believe we have planned it with the appropriate level of markdowns and promotions.

If business were to slow down and we needed to step on the pedal in order to liquidate goods and cleanup, that's what we would do. We don't stay with problems. That is our business model. So I don't want to drive any guarantees of whatever, but our models and our business practices, that's what we do.

So we will react to whatever the market conditions are. I think we have clearly prudently planned it in a way that we have given ourselves room to be promotionally competitive with the rest of the market. But if that steps up another notch in an environment like this, which is the fourth-quarter holiday season, it happens just very quickly and you need to react, we are going to react.

So we will be transparent. We will let the market know what's going on. We will clearly send a signal to let everybody understand it. But I think in our model we have built that all in. And the one thing that gives me a level of comfort about all that is the weakness that was experienced last year in December and January that we really felt because of the market conditions we left money on the table last year.

I think there is really an out -- I think we have really built that into our plans that it will be promotional and it will require us to be competitive with the market. And we have tried to factor that in as best as possible.

Perfect, appreciate it. Thanks, guys. Best of luck.

Thank you. Okay, everyone, first of all, I'd like to just wish everybody Happy Holidays, Merry Christmas, Happy Hanukkah. And I would also say to everyone, we look forward to speaking to you on our fourth-quarter call and have a great and healthy and Happy New Year. Thank you.

That does conclude today's call. We thank everyone again for their participation.